Exhibit  EX-4.1




NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE OR PROVINCIAL SECURITIES LAWS. THE SECURITIES MAY NOT
BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED WITHIN THE UNITED STATES OR TO ANY U.S. PERSON
(AS DEFINED IN RULE 902 OF THE SECURITIES ACT OF 1933, AS AMENDED) (I) IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT IN RELIANCE UPON 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 TOGETHER WITH OTHER SECURITIES OF THE
HOLDER.



UNLESS PERMITTED UNDER CANADIAN SECURITIES LEGISLATION, THE HOLDER OF THIS NOTE AND THE COMMON
SHARES ISSUABLE UPON CONVERSION OF THIS NOTE SHALL NOT TRADE SUCH SECURITIES BEFORE NOVEMBER 28,
2005.



ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS
3(c)(iii) AND 19(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.



ART Advanced Research Technologies Inc.




Senior Secured Convertible Note




	 	 	 
	Issuance Date: July 28, 2005

	 	Principal: U.S. $2,500,000.00






FOR VALUE RECEIVED, ART Advanced Research Technologies Inc., a Canadian corporation (the
"Company”), hereby promises to pay to the order of PORTSIDE GROWTH AND OPPORTUNITY FUND or
registered assigns (“Holder”) the amount set out above as the Principal (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), on any Installment Date with respect to the Installment
Amount due on such Installment Date (each, as defined herein), acceleration, redemption or
otherwise (in each case in accordance with the terms hereof) and to pay interest (“Interest”) on
any outstanding Principal at the Interest Rate, from the date set out above as the Issuance Date
(the “Issuance Date”) until the same becomes due and payable, whether upon an Interest Date (as
defined below), any Installment Date or, the Maturity Date, acceleration, conversion, redemption or
otherwise (in each case in accordance with the terms hereof). This Senior Secured Convertible Note
(including all Senior Secured Convertible Notes issued in exchange, transfer or replacement hereof,
this “Note”) is one of an issue of Senior Secured Convertible Notes issued pursuant to the
Securities Purchase Agreement (as defined below) on the Closing Date (collectively, the “Notes” and
such other Senior Secured Convertible Notes, the “Other Notes”). Certain capitalized terms used
herein are defined in Section 31.



(1) PAYMENTS OF PRINCIPAL. On each Installment Date, the Company shall pay to the
Holder an amount equal to the Installment Amount due on such Installment Date in accordance with
Section 8. The “Maturity Date” shall be January 28, 2008, as the same may be extended at the
option of the Holder (i) in the event that, and for so long as, an Event of Default (as defined in
Section 4(a)) shall have occurred and be continuing or any event shall have occurred and be
continuing which with the passage of time and the failure to cure would result in an Event of
Default and (ii) through the date that is ten (10) days after the consummation of a Change of
Control in the event that a Change of Control is publicly announced or a Change of Control Notice
(as defined in Section 5(b)) is delivered prior to the Maturity Date.



(2) INTEREST; INTEREST RATE. Interest on this Note shall commence accruing on the
Issuance Date and shall be computed on the basis of a 365-day year and actual days elapsed and
shall be payable in arrears for each Calendar Quarter on the tenth (10th) day of the
succeeding Calendar Quarter during the period beginning on the Issuance Date and ending on, and
including, the Maturity Date (each, an “Interest Date”) with the first Interest Date being October
10, 2005. Interest shall be payable on each Interest Date, to the record holder of this Note on
the applicable Interest Date, in cash (“Cash Interest”) or, at the option of the Company, in Common
Shares (“Interest Shares”) or a combination thereof, provided that the Interest which accrued
during any period may be payable in Interest Shares if, and only if, (i) the Company delivers
written notice (each, an “Interest Election Notice”) of such election to each holder of the Notes
on or prior to the Interest Notice Due Date and (ii) the Interest Shares shall be eligible for sale
without restriction and without the need for registration under any applicable federal or state
securities laws. Each Interest Election Notice must specify the amount of Interest that shall be
paid as Cash Interest, if any, and the amount of Interest that shall be paid in Interest Shares.
Interest to be paid on an Interest Date in Interest Shares shall be paid in a number of fully paid
and non-assessable (rounded to the nearest whole share in accordance with Section 3(a)) Common
Shares equal to the quotient of (a) the amount of Interest payable on such Interest Date less any
Cash Interest paid and (b) the Interest Conversion Price in effect on the applicable Interest Date.
If any Interest Shares are to be paid on an Interest Date, then the Company shall (X) provided
that the Company’s transfer agent (the “Transfer Agent”) is participating in the Depository Trust
Company (“DTC”) Fast Automated Securities Transfer Program, credit such aggregate number of
Interest Shares to which the Holder shall be entitled to the Holder’s or its designee’s balance
account with DTC through its Deposit Withdrawal Agent Commission system, or (Y) if the foregoing
shall not apply, issue and deliver on the applicable Interest Date, to the address set forth in the
register maintained by the Company for such purpose pursuant to the Securities Purchase Agreement
or to such address as specified by the Holder in writing to the Company at least three (3) Trading
Days prior to the applicable Interest Date, a certificate, registered in the name of the Holder or
its designee, for the number of Interest Shares to which the Holder shall be entitled.
Notwithstanding the foregoing, the Company shall not be entitled to pay Interest in Interest Shares
and shall be required to pay such Interest in cash as Cash Interest on the applicable Interest Date
if, unless consented to in writing by the Holder, during the period commencing on the applicable
Interest Notice Due Date through the applicable Interest Date the Equity Conditions have not been
satisfied. 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 in accordance with Section 3(b)(i). Upon the occurrence and during the continuance of an
Event of Default, the Interest Rate shall be increased to twelve percent (12%). 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.



(3) CONVERSION OF NOTES. This Note shall be convertible into the Company’s common
shares (the “Common Shares”), 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 Issuance Date, the Holder shall be entitled to convert any portion of the
outstanding and unpaid Conversion Amount (as defined below) into fully paid and non-assessable
Common Shares in accordance with Section 3(c), at the Conversion Rate (as defined below). The
Company shall not issue any fraction of a Common Share upon any conversion. If any conversion
would result in the issuance of a fraction of a Common Share, the Company shall round such fraction
of a Common Share up to the nearest whole share.



(b) Conversion Rate. The number of Common Shares 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 and (B) accrued and
unpaid Interest with respect to such Principal.



(ii) "Conversion Price” means, as of any Conversion Date (as defined below) or other date of
determination, Cdn $0.99, subject to adjustment as provided herein after the Subscription Date.



(c) Mechanics of Conversion.



(i) Optional Conversion. To convert any Conversion Amount into Common Shares on any
date (a “Conversion Date”), the Holder shall (A) transmit by facsimile (or otherwise deliver), for
receipt on or prior to 5:00 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 courier for delivery to
the Company as soon as practicable on or following such date (or an indemnification undertaking
with respect to this Note in the case of its loss, theft or destruction). On or before the first
(1st) 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 Transfer Agent. On or before the first (1st) Trading Day following the date of
receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall (X) provided that the
Transfer Agent is participating in the DTC Fast Automated Securities Transfer Program, credit such
aggregate number of Common Shares 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 the foregoing shall not apply, 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
Common Shares 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 19(d))
representing the outstanding Principal not converted. The Person or Persons entitled to receive
the Common Shares issuable upon a conversion of this Note shall be treated for all purposes as the
record holder or holders of such Common Shares on the Conversion Date. In the event of a partial
conversion of this Note pursuant hereto, the principal amount converted shall be deducted from the
Installment Amounts relating to the Installment Dates as set forth in the Conversion Notice.



(ii) Company’s Failure to Timely Convert. If within three (3) Trading Days after the
Company’s receipt of the facsimile copy of a Conversion Notice the Company shall fail to issue and
deliver a certificate to the Holder or credit the Holder’s balance account with DTC for the number
of Common Shares to which the Holder is entitled upon such holder’s conversion of any Conversion
Amount (a “Conversion Failure”), and if on or after such Trading Day the Holder purchases (in an
open market transaction or otherwise) Common Shares to deliver in satisfaction of a sale by the
Holder of Common Shares issuable upon such conversion that the Holder anticipated receiving from
the Company (a “Buy-In”), then the Company shall, within three (3) Trading Days after the Holder’s
request and in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the
Holder’s total purchase price (including brokerage commissions, if any) for the Common Shares so
purchased (the “Buy-In Price"), at which point the Company’s obligation to deliver such certificate
(and to issue such Common Shares) shall terminate, or (ii) promptly honor its obligation to deliver
to the Holder a certificate or certificates representing such Common Shares and pay cash to the
Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such
number of Common Shares, times (B) the Closing Bid Price on the Conversion Date.



(iii) Book-Entry. Notwithstanding anything to the contrary set forth herein, upon
conversion of any portion of this Note in accordance with the terms hereof, the Holder shall not be
required to physically surrender this Note to the Company unless (A) the full Conversion Amount
represented by this Note is being converted or (B) the Holder has provided the Company with prior
written notice (which notice may be included in a Conversion Notice) requesting reissuance of this
Note upon physical surrender of this Note. The Holder and the Company shall maintain records
showing the Principal and Interest 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 Common Shares issuable to the Holder in connection with a conversion
of this Note, the Company shall issue to the Holder the number of Common Shares not in dispute and
resolve such dispute in accordance with Section 24.



(d) Limitations on Conversions.



(i) Beneficial Ownership. Notwithstanding anything contained herein to the contrary,
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) that would be
convertible into that number of Common Shares which, when added to the number of Common Shares
otherwise beneficially owned by the Holder including those issuable upon the exercise of
convertible securities, warrants or options held by the Holder, would exceed 4.99% (the “Maximum
Percentage”) of the outstanding Common Shares at the time of conversion. For purposes of this
Section 3(d)(i), beneficial ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. For purposes of this Section 3(d)(i), in determining
the number of outstanding Common Shares, the Holder may rely on the number of outstanding Common
Shares as reflected in (x) the Company’s most recent Form 20-F or Form 6-K, as the case may be (y)
a more recent public announcement by the Company or (z) any other notice by the Company or the
Transfer Agent setting forth the number of Common Shares outstanding. For any reason at any time,
upon the written or oral request of the Holder, the Company shall within one (1) Trading Day
confirm orally and in writing to the Holder the number of Common Shares then outstanding. In any
case, the number of outstanding Common Shares 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 Common Shares was reported. By
written notice to the Company, the Holder may increase or decrease the Maximum Percentage to any
other percentage not in excess of 9.99% specified in such notice; provided that (i) any such
increase will not be effective until the sixty-first (61st) day after such notice is
delivered to the Company, and (ii) any such increase or decrease will apply only to the Holder and
not to any other holder of Notes.



(ii) Principal Market Regulation. The Company shall not be obligated to issue any
Common Shares upon conversion of this Note if the issuance of such Common Shares would exceed the
aggregate number of Common Shares which the Company may issue upon conversion or exercise, as
applicable, of the Notes and Warrants and the payment of Interest in Interest Shares without
breaching the Company’s obligations under the rules or regulations of the Principal Market (the
"Exchange Cap”). The Company shall seek the approval of the Principal Market, and shall seek the
approval of its shareholders as may be required by the applicable rules of the Principal Market,
for issuances of Common Shares in excess of the Exchange Cap. Once the Company has obtained the
approval or approvals required by the foregoing sentence, the Exchange Cap shall no longer be
applicable. Until such approval is obtained, no purchaser of the Notes pursuant to the Securities
Purchase Agreement (the “Purchasers”) shall be issued in the aggregate, upon conversion or
exercise, as applicable, of Notes or Warrants or the payment of Interest in Interest Shares, Common
Shares (as adjusted for share splits, share dividends, share combinations and other similar
transactions) 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 the Purchasers 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 Common Shares 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 Common Shares 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.



(e) Restrictive Legends. Any Common Shares issued upon conversion of this Note shall
bear the restrictive legends referred to in Sections 2(g) and 2(h) of the Securities Purchase
Agreement, to the extent required thereby.



(4) RIGHTS UPON EVENT OF DEFAULT.



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



(i) the failure of the Common Shares issued upon conversion or as part of any Installment
Amount to be freely tradable on or prior to the Effectiveness Time, or, after the Effectiveness
Time, the Common Shares of any holder of Notes shall cease to be freely tradable and such lapse
continues for a period of fifteen (15) consecutive days or for more than an aggregate of thirty
(30) days in any 365-day period;



(ii) the suspension from trading or failure of the Common Shares to be listed on an Eligible
Market for a period of five (5) consecutive Trading Days or for more than an aggregate of fifteen
(15) Trading Days in any 365-day period;



(iii) the Company’s (A) failure to cure a Conversion Failure by delivery of the required
number of Common Shares 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 Common Shares that is tendered in accordance with the provisions of
the Notes;



(iv) at any time following the tenth (10th) consecutive Trading Day that the number
of Common Shares that are available for issuance to the Holder is less than the number of Common
Shares that the Holder would be entitled to receive upon a conversion of the full Conversion Amount
of this Note (without regard to any limitations on conversion set forth in Section 3(d) or
otherwise);



(v) the Company’s failure to pay to the Holder any amount of Principal, Interest or other
amounts when and as due under this Note (including, without limitation, the Company’s failure to
pay any redemption payments) 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 when and as due, in which case only if such
failure continues for a period of at least three (3) Trading Days;



(vi) the occurrence of any default under, redemption of or acceleration prior to maturity of
more than $300,000 of Indebtedness (as defined in Section 3(s) of the Securities Purchase
Agreement) of the Company or any of its Subsidiaries (as defined in Section 3(a) of the Securities
Purchase Agreement) other than with respect to any Other Notes;



(vii) the Company or any of its Subsidiaries, pursuant to or within the meaning of Title 11,
U.S. Code, the Bankruptcy and Insolvency Act (Canada), the Companies Creditors Arrangement Act
(Canada) 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, interim receiver,
receiver and manager, 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;



(viii) 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;



(ix) a final judgment or judgments for the payment of money aggregating in excess of
$1,000,000 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 $1,000,000 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;



(x) other than as set forth in item (xi) below, the Company breaches any representation,
warranty, covenant or other term or condition of any Transaction Document, except, in the case of a
breach of a covenant which is curable, only if such breach continues for a period of at least
fifteen (15) consecutive Trading Days after notice thereof by the Holder or any holder of Other
Notes; provided, however, that no notice shall be required to be made to the Company with respect
to any breach of any representation, warranty, covenant or other term or condition of the Security
Documents;



(xi) any breach or failure in any respect to comply with either of Sections 8 or 15 of this
Note; or



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



(b) Redemption Right. Promptly after the occurrence of an Event of Default with
respect to this Note or any Other Note, the Company shall 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 portion of this Note the Holder is
electing 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 greater of (i) the
product of (x) the Conversion Amount to be redeemed and (y) the Redemption Premium and (ii) the
product of (A) the Conversion Rate with respect to such Conversion Amount in effect at such time as
the Holder delivers an Event of Default Redemption Notice and (B) the Closing Sale Price of the
Common Shares on the date immediately preceding such Event of Default (the “Event of Default
Redemption Price”). Redemptions required by this Section 4(b) shall be made in accordance with the
provisions of Section 13. In the event of a partial redemption of this Note pursuant hereto, the
principal amount redeemed shall be deducted from the Installment Amounts relating to the applicable
Installment Dates as set forth in the Event of Default Redemption Notice.



(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 (if other than the Company) 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
satisfactory to the Required Holders and approved by the Required Holders prior to such Fundamental
Transaction, including agreements to deliver to each holder of Notes in exchange for such Notes a
security of the Successor Entity evidenced by a written instrument substantially similar in form
and substance to the Notes, including, without limitation, having a principal amount and interest
rate equal to the principal amounts and the interest rates of the Notes held by such holder and
having similar ranking to the Notes, and satisfactory to the Required Holders. Upon the occurrence
of any Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so
that from and after the date of such Fundamental Transaction, the provisions of this Note referring
to the “Company” shall refer instead to the Successor Entity), and may exercise every right and
power of the Company and shall assume all of the obligations of the Company under this Note with
the same effect as if such Successor Entity had been named as the Company herein. Upon
consummation of the Fundamental Transaction, the Successor Entity (if other than the Company) shall
deliver to the Holder confirmation that there shall be issued upon conversion or redemption of this
Note at any time after the consummation of the Fundamental Transaction, in lieu of the Company’s
Common Shares (or other securities, cash, assets or other property) purchasable upon the conversion
or redemption of the Notes prior to such Fundamental Transaction, such shares, securities, cash,
assets or any other property whatsoever (including warrants or other purchase or subscription
rights) which the Holder would have been entitled to receive upon the happening of such Fundamental
Transaction had this Note been converted immediately prior to such Fundamental Transaction, as
adjusted in accordance with the provisions of this Note; provided, however, that in the event that,
pursuant to the terms of the Fundamental Transaction, the holders of Common Shares may elect the
consideration to be received in exchange for the Common Shares in the such Fundamental Transaction,
the Holder shall elect, within the same time periods as provided to the holders of Common Shares,
the kind or amount of such shares, securities, cash, assets or any other property (including
warrants or other purchase or subscription rights) that the Holder will, following the consummation
of such transaction, be entitled to receive upon conversion or redemption; provided, further,
however, that no such election by the Holder shall be construed to require the conversion or
redemption of this Note in connection with such Fundamental Transaction. If the Holder is required
to make any election of the kind described in the foregoing sentence, the Company shall deliver to
the Holder all documentation, informational materials and election forms relating to such
Fundamental Transaction contemporaneously with the delivery of such documentation, materials and
forms to the holders of the Common Shares. 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) Holder Redemption Right. No sooner than fifteen (15) days nor later than ten (10)
days prior to the consummation of a Change of Control, but not prior to the public announcement of
such Change of Control, the Company shall deliver written notice thereof via facsimile and
overnight courier to the Holder (a “Change of Control Notice”); provided that in the event of a
Change of Control covered by Section 5(c)(i), the Company shall deliver a Company Change of Control
Redemption Notice in lieu of a Change of Control Notice. At any time during the period beginning
after the Holder’s receipt of a Change of Control Notice and ending on the date of the consummation
of such Change of Control (or, in the event a Change of Control Notice is not delivered at least
ten (10) days prior to a Change of Control, at any time on or after the date which is ten (10) days
prior to a Change of Control and ending ten (10) days after the consummation of such Change of
Control), the Holder may require the Company to redeem all or any portion of this Note by
delivering written notice thereof (“Change of Control Redemption Notice”) to the Company, which
Change of Control Redemption Notice shall indicate the Conversion Amount the Holder is electing to
redeem. The portion of this Note subject to redemption pursuant to this Section 5 shall be
redeemed by the Company at a price equal to the greater of (i) the product of (x) the Conversion
Amount being redeemed and (y) the quotient determined by dividing (A) the Closing Sale Price of the
Common Shares immediately following the public announcement of such proposed Change of Control by
(B) the Conversion Price and (ii) 115% of the Conversion Amount being redeemed (the “Holder Change
of Control Redemption Price”). Redemptions required by this Section 5 shall be made in accordance
with the provisions of Section 13. In the event of a partial redemption of this Note pursuant
hereto, the principal amount redeemed shall be deducted from the Installment Amounts relating to
the applicable Installment Dates as set forth in the Change of Control Redemption Notice.



(c) (i) Company Redemption Obligation. Notwithstanding the foregoing provisions of
this Section 5, in the event of a Change of Control where the Successor Entity (not including its
Parent Entity) is not a publicly traded entity whose common shares or equivalent equity security
are quoted or listed for trading on an Eligible Market, then the Company shall, simultaneously with
the consummation of such Change of Control, redeem this Note (a “Company Change of Control
Redemption”), in whole and not in part, at a price equal to 125% of the Conversion Amount (the
"Company Change of Control Redemption Price” and, together with the Holder Change of Control
Redemption Price, a “Change of Control Redemption Price”). No sooner than fifteen (15) days nor
later than ten (10) days prior to the consummation of any Change of Control described in the
foregoing sentence, but not prior to the public announcement of such Change of Control, the Company
shall provide notice (the “Company Change of Control Redemption Notice”) of a Company Change of
Control Redemption in writing to the Holder. The Company Change of Control Redemption Notice shall
state (x) the anticipated Trading Day the Change of Control shall be consummated (the “Company
Change of Control Redemption Date”), (y) the aggregate Conversion Amount of the Notes subject to
redemption from all the holders of the Notes pursuant to this Section 5(c) and (z) the Company
Change of Control Redemption Price that to be paid to such Holder on the Company Change of Control
Redemption Date; provided, however, that in the event the Company Change of Control Redemption Date
is changed from the anticipated date set forth in the Company Change of Control Redemption Notice,
the Company shall inform the Holder in writing of the new Company Change of Control Redemption Date
within one (1) Trading Day of the date on which the Company learns of such new date.



(ii) Pro Rata Redemption Requirement. If the Company delivers any Company Change of
Control Redemption Notice to the Holder with respect to the full Conversion Amount of this Note
pursuant to Section 5(c)(i), then it must simultaneously take the same action and in the same
proportion with respect to the Other Notes.



(d) Redemptions required by this Section 5 shall have priority to payments to shareholders in
connection with a Change of Control. Notwithstanding anything to the contrary in this Section 5,
but subject to Section 3(d), until the Change of Control Redemption Price (together with any
interest thereon) is paid in full, the Conversion Amount submitted for redemption under this
Section 5(c) (together with any interest thereon) may be converted, in whole or in part, by the
Holder into Common Shares pursuant to Section 3.



(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 shares, warrants, securities or other property pro
rata to all record holders of any class of Common Shares (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 Common
Shares 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 Shares 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, but subject to the Company’s obligation to redeem this Note pursuant to Section
5(c) hereof, prior to the consummation of any Fundamental Transaction pursuant to which holders of
Common Shares are entitled to receive securities or other assets with respect to or in exchange for
Common Shares (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, (i) in
addition to the Common Shares receivable upon such conversion, such securities or other assets to
which the Holder would have been entitled with respect to such Common Shares had such Common Shares
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 Common
Shares otherwise receivable upon such conversion, such securities or other assets received by the
holders of Common Shares 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 Common Shares) at a conversion
rate for such consideration commensurate with the Conversion Rate. Provision made pursuant to the
preceding sentence shall be in a form and substance satisfactory to the Required Holders. The
provisions of this Section shall apply similarly and equally to successive Corporate Events and
shall be applied without regard to any limitations on the conversion or redemption of this Note.



(7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.



(a) Adjustment of Conversion Price upon Issuance of Common Shares. If and whenever on
or after the Subscription Date until the first (1st) anniversary of the Subscription
Date, the Company issues or sells, or in accordance with this Section 7(a) is deemed to have issued
or sold, any Common Shares (including the issuance or sale of Common Shares owned or held by or for
the account of the Company, but excluding Common Shares deemed to have been issued or sold by the
Company in connection with any Excluded Security) for a consideration per share (the “New Issuance
Price”) 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 reduced to an amount
equal to the New Issuance Price. 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 Common Share 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 Common Share 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 Common Share 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 Common Share 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 Common Shares or of such Convertible Securities upon the
exercise of such Options or upon the actual issuance of such Common Shares upon conversion
or exchange or exercise of such Convertible Securities.




(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 Common
Share is issuable upon such conversion or exchange or exercise thereof is less than the
Applicable Price, then such Common Share shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the issuance of sale of such Convertible
Securities for such price per share. For the purposes of this Section 7(a)(ii), the “price
per share for which one Common Share 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 Common Share 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 Common Shares 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 Shares
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 Subscription Date are changed in the
manner described in the immediately preceding sentence, then such Option or Convertible
Security and the Common Shares 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, the Options will be deemed to have been issued for a consideration
of $.01. If any Common Shares, 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 Shares, 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 Shares, 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 Shares, 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)
Trading Days after the tenth (10th) 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.




(v) Record Date. If the Company takes a record of the holders of Common Shares
for the purpose of entitling them (A) to receive a dividend or other distribution payable in
Common Shares, Options or in Convertible Securities or (B) to subscribe for or purchase
Common Shares, Options or Convertible Securities, then such record date will be deemed to be
the date of the issue or sale of the Common Shares 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 Shares.
If the Company at any time on or after the Subscription Date subdivides (by any share split, share
dividend, recapitalization or otherwise) one or more classes of its outstanding Common Shares into
a greater number of shares, the Conversion Price in effect immediately prior to such subdivision
will be proportionately reduced. If the Company at any time on or after the Subscription Date
combines (by combination, reverse share split or otherwise) one or more classes of its outstanding
Common Shares 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 share appreciation rights, phantom share 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.



(8) COMPANY INSTALLMENT CONVERSION OR REDEMPTION.



(a) General. Subject to and in accordance with the terms of this Section 8, on each
applicable Installment Date, the Company shall pay to the Holder of this Note the Installment
Amount as of such Installment Date by the combination of any of the following, (i) provided that
during the period commencing with the Company Installment Notice (as defined below) through the
applicable Installment Date, the Equity Conditions have been satisfied (or waived in writing by the
Holder), requiring the conversion of a portion of the applicable Installment Amount, in whole or in
part, in accordance with this Section 8 (a “Company Conversion”), and/or (ii) redeeming the
applicable Installment Amount, in whole or in part, in accordance with this Section 8 (a “Company
Redemption”); provided that all of the outstanding applicable Installment Amount as of each such
Installment Date must be converted and/or redeemed by the Company on the applicable Installment
Date, subject to the provisions of this Section 8. On or prior to the Installment Notice Due Date,
the Company shall deliver written notice (each, a “Company Installment Notice” and, in the event a
Company Redemption is elected in such notice, together with the Event of Default Redemption Notice,
Change of Control Redemption Notice and the Company Change of Control Redemption Notice, the
"Redemption Notices” and each a “Redemption Notice”), to the Holder which Company Installment
Notice shall state (i) the portion, if any, of the applicable Installment Amount which the Company
elects to convert pursuant to a Company Conversion, which amount when added to the Company
Redemption Amount must equal the applicable Installment Amount (the “Company Conversion Amount”),
(ii) the portion, if any, of the applicable Installment Amount which the Company elects to redeem
pursuant to a Company Redemption (the “Company Redemption Amount”), which amount when added to the
Company Conversion Amount must equal the applicable Installment Amount and (iii) if the Company has
elected, in whole or in part, a Company Conversion, then the Company Installment Notice shall
certify that the Equity Conditions have been satisfied as of the date of the Company Installment
Notice. If the Company does not timely deliver a Company Installment Notice in accordance with
this Section 8(a), then the “Company Redemption Amount” and the “Company Conversion Amount” with
respect to such Installment Date shall be in such amounts and proportions as the Holder shall
designate in writing (the “Holder Installment Notice”), to the Company in its sole discretion and
the Company shall be deemed to have delivered a Company Installment Notice setting forth such
amounts; provided, however, that if such Holder Installment Notice designates a Company Conversion
Amount the Company shall certify in writing to the Holder within two (2) Trading Days of receipt of
such Holder Installment Notice whether or not the Equity Conditions have been satisfied; provided,
further, however that if such conditions have not been satisfied the Holder may thereafter (x)
elect to require the Company to pay the entire Installment Amount as a Company Redemption or (y)
waive the Equity Conditions and require the Company to pay the Installment Amount in the manner set
forth in the Holder Installment Notice. Each Company Installment Notice whether actually given or
deemed given shall be irrevocable. Except as expressly provided in this Section 8(a), the Company
shall redeem and convert the applicable Installment Amount of this Note pursuant to this Section 8
and the corresponding Installment Amounts of the Other Notes pursuant to the corresponding
provisions of the Other Notes in the same ratio of the Installment Amount being redeemed and
converted hereunder. The Company Redemption Amount (whether set forth in the Company Installment
Notice or by operation of this Section 8) shall be redeemed in accordance with Section 8(b) and the
Company Conversion Amount shall be converted in accordance with Section 8(c). Notwithstanding the
foregoing, unless the Company is given notice to the contrary by the Holder, if the arithmetic
average of the Weighted Average Price of the Common Shares during the applicable Company Conversion
Measuring Period is greater than the Conversion Price, then the Company shall be deemed to have
elected a Company Conversion in the Company Installment Notice as to the entire applicable
Installment Amount.



(b) Mechanics of Company Redemption. If the Company elects, or is deemed to have
elected, a Company Redemption in accordance with Section 8(a), then the Company Redemption Amount,
if any, which is to be paid to the Holder on the applicable Installment Date shall be redeemed by
the Company on such Installment Date, and the Company shall pay to the Holder on such Installment
Date, by wire transfer of immediately available funds, an amount in cash (the “Company Installment
Redemption Price” and, together with the Event of Default Redemption Price, Change of Control
Redemption Price and the Company Change of Control Redemption Price, the “Redemption Prices” and
each a “Redemption Price”) equal to 100% of the Company Redemption Amount. If the Company fails to
redeem the Company Redemption Amount on the applicable Installment Date by payment of the Company
Installment Redemption Price on such date, then at the option of the Holder designated in writing
to the Company (any such designation, a “Conversion Notice” for purposes of this Note), the Holder
may require the Company to convert all or any part of the Company Redemption Amount at the Company
Conversion Price. Conversions required by this Section 8(b) shall be made in accordance with the
provisions of Section 3(c). Notwithstanding anything to the contrary in this Section 8(b), but
subject to Section 3(d), until the Company Installment Redemption Price (together with any interest
thereon) is paid in full, the Company Redemption Amount (together with any interest thereon) may be
converted, in whole or in part, by the Holder into Common Shares pursuant to Section 3. In the
event the Holder elects to convert all or any portion of the Company Redemption Amount prior to the
applicable Installment Date as set forth in the immediately preceding sentence, the Company
Redemption Amount so converted shall be deducted from the Installment Amount to be paid on such
Installment Date.



(c) Mechanics of Company Conversion. Subject to Section 3(d), if the Company delivers
a Company Installment Notice and elects, or is deemed to have elected, in whole or in part, a
Company Conversion in accordance with Section 8(a), then the applicable Company Conversion Amount,
if any, which remains outstanding shall be converted as of the applicable Installment Date by
converting on such Installment Date such Company Conversion Amount at the Company Conversion Price;
provided that the Equity Conditions have been satisfied (or waived in writing by the Holder) on
such Installment Date. If the Equity Conditions are not satisfied (or waived in writing by the
Holder) on such Installment Date, then at the option of the Holder designated in writing to the
Company, the Holder may require the Company to do any one or more of the following: (i) the Company
shall redeem all or any part designated by the Holder of the unconverted Company Conversion Amount
(such designated amount is referred to as the “First Redemption Amount”) on such Installment Date
and the Company shall pay to the Holder on such Installment Date, by wire transfer of immediately
available funds, an amount in cash equal to 120% of such First Redemption Amount, or (ii) the
Company Conversion shall be null and void with respect to all or any part designated by the Holder
of the unconverted Company Conversion Amount and the Holder shall be entitled to all the rights of
a holder of this Note with respect to such amount of the Company Conversion Amount; provided,
however, that the Conversion Price for such unconverted Company Conversion Amount shall thereafter
be adjusted to equal the lesser of (A) the Company Conversion Price as in effect on the date on
which the Holder voided the Company Conversion and (B) the Company Conversion Price as in effect on
the date on which the Holder delivers a Conversion Notice relating thereto. If the Company fails
to redeem any First Redemption Amount on or before the applicable Installment Date by payment of
such amount on the applicable Installment Date, then the Holder shall have the rights set forth in
Section 13(a) as if the Company failed to pay the applicable Company Redemption Price and all other
rights under this Note (including, without limitation, such failure constituting an Event of
Default described in Section 4(a)(xi)). Notwithstanding anything to the contrary in this Section
8(c), but subject to 3(d), until the Company delivers Common Shares representing the Company
Conversion Amount to the Holder, the Company Conversion Amount may be converted by the Holder into
Common Shares pursuant to Section 3. In the event the Holder elects to convert the Company
Conversion Amount prior to the applicable Installment Date as set forth in the immediately
preceding sentence, the Company Conversion Amount so converted shall be deducted from the
Installment Amount to be paid on such Installment Date.



(9) COMPANY’S RIGHT OF MANDATORY CONVERSION.



(a) Mandatory Conversion. If at any time from and after the one-year anniversary of
the Effectiveness Time (the “Mandatory Conversion Eligibility Date”), (i) the Closing Sale Price of
the Common Shares equals or exceeds 225% of the Conversion Price on the Issuance Date (subject to
appropriate adjustments for share splits, share dividends, share combinations and other similar
transactions after the Subscription Date) for each of any twenty (20) consecutive Trading Days
following the Mandatory Conversion Eligibility Date (the “Mandatory Conversion Measuring Period”)
and (ii) the Equity Conditions shall have been satisfied (or waived in writing by the Holder,
provided that the Holder may not waive the provisions of Section 3(d)(ii)), during the period
commencing on the Mandatory Conversion Notice Date through the applicable Mandatory Conversion Date
(each, as defined below), the Company shall have the right to require the Holder to convert all,
but not less than all, of the Conversion Amount then remaining under this Note plus the Present
Value of Interest as designated in the Mandatory Conversion Notice (as defined below) into fully
paid, validly issued and non-assessable Common Shares in accordance with Section 3(c) hereof at the
Conversion Rate in effect on the Mandatory Conversion Date (as defined below) (a “Mandatory
Conversion”) or, at the Company’s option and solely with respect to the Present Value of Interest,
cash or a combination of Common Shares and cash. The Company may exercise its right to require
conversion under this Section 9(a), by delivering within not more than two (2) Trading Days
following the end of such Mandatory Conversion Measuring Period a written notice thereof by
facsimile and overnight courier to all, but not less than all, of the holders of Notes and the
Transfer Agent (the “Mandatory Conversion Notice” and the date all of the holders received such
notice by facsimile is referred to as the “Mandatory Conversion Notice Date”). The Mandatory
Conversion Notice shall be irrevocable. The Mandatory Conversion Notice shall state (i) the
Trading Day selected for the Mandatory Conversion in accordance with Section 9(a), which Trading
Day shall be at least ten (10) Trading Days but not more than sixty (60) 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 all of the holders of the Notes pursuant
to this Section 9 (and analogous provisions under the Other Notes), (iii) the number of Common
Shares to be issued to, and the Present Value of Interest to be paid to, such Holder on the
Mandatory Conversion Date and (iv) the portion, if any, of the Present Value of Interest that shall
be paid in cash and the portion, if any, that shall be paid in Common Shares.



(b) Pro Rata Conversion Requirement. If the Company elects to cause a conversion of
any Conversion Amount of this Note pursuant to Section 9(a), then it must simultaneously take the
same action in the same proportion with respect to the Other Notes. All Conversion Amounts
converted by the Holder after the Mandatory Conversion Notice Date shall reduce the Conversion
Amount of this Note required to be converted on the Mandatory Conversion Date. If the Company has
elected a Mandatory Conversion, the mechanics of conversion set forth in Section 3(c) shall apply,
to the extent applicable, as if the Company and the Transfer Agent had received from the Holder on
the Mandatory Conversion Date a Conversion Notice with respect to the Conversion Amount being
converted pursuant to the Mandatory Conversion.



(10) SECURITY. This Note and the Other Notes are secured to the extent and in the
manner set forth in the Security Documents (as defined in the Securities Purchase Agreement).



(11) NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will
not, by amendment of its Articles 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.



(12) AUTHORIZED SHARES.



(a) Reservation. The Company shall have sufficient authorized and unissued Common
Shares for each of the Notes equal to the number of Common Shares necessary to effect the
conversion at 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 have available out of its authorized and unissued Common Shares, solely for the
purpose of effecting the conversion of the Notes, the number of Common Shares 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 Common Shares so available be less than the number of shares required
to be reserved by the previous sentence (without regard to any limitations on conversions) (the
"Required Amount”).



(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 unissued Common Shares
to satisfy its obligation to have available for issuance upon conversion of the Notes at least a
number of Common Shares equal to the Required Amount (an “Authorized Share Failure”), then the
Company shall immediately take all action necessary to increase the Company’s authorized Common
Shares to an amount sufficient to allow the Company to reserve the Required Amount for the Notes
then outstanding.



(13) HOLDER’S REDEMPTIONS.



(a) Mechanics. The Company shall deliver the applicable Event of Default Redemption
Price to the Holder within five (5) Trading 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 if such notice is
received prior to the consummation of such Change of Control and within five (5) Trading Days after
the Company’s receipt of such notice otherwise. The Company shall deliver the applicable Company
Installment Redemption Price to the Holder on the applicable Installment Date. In the event of a
redemption of less than all of the Conversion Amount of this Note, the Company shall promptly cause
to be issued and delivered to the Holder a new Note (in accordance with Section 19(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 has not been paid. Upon the Company’s receipt of such
notice, (x) the 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
19(d)) to the Holder representing such Conversion Amount 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 Redemption Notice is voided and (B) the lowest Closing Bid Price of the Common
Shares during the period beginning on and including the date on which the Redemption Notice is
delivered to the Company and ending on and including the date on which the Redemption Notice is
voided.



(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) or Section 5(b) (each,
an “Other Redemption Notice”), the Company shall immediately 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) Trading Day period beginning on and including the date which is three
(3) Trading Days prior to the Company’s receipt of the Holder’s Redemption Notice and ending on and
including the date which is three (3) Trading 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) Trading 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 (7) Trading Day period.



(14) VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as required by law, the Canada Business Corporations Act and as expressly provided in
this Note, or any other Transaction Documents.



(15) COVENANTS.



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



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



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



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



(e) Financial Covenants. The Company shall maintain, for each Calendar Quarter, (i)
LTM Tested Revenues equal to or exceeding the applicable LTM Tested Revenues Threshold, (ii)
Quarterly Revenues equal to or exceeding the applicable Quarterly Revenues Threshold, (iii) Gross
Margin equal to or exceeding the applicable Tested Gross Margin Threshold and (iv) Cash Balance
equal to or exceeding the applicable Cash Balance Threshold; provided, however, that the Company
shall not be required to satisfy the LTM Tested Revenues Threshold until December 31, 2006 (for the
measurement period beginning on December 31, 2005).



(i) The Company shall announce whether it has met the Cash Balance Threshold (the “Cash
Balance Announcement”) for each Calendar Quarter no later than the ten (10th) day after
the end of each Calendar Quarter and such announcement shall include the amount of the Company’s
Cash Balance. On the date of such announcement, the Company shall also provide to the Holders a
certification, executed on behalf of the Company by its Chief Financial Officer, as to the amount
of the Cash Balance as of the end of, and for, the Calendar Quarter to which such Cash Balance
Announcement relates.



(ii) The Company shall announce its operating results (the “Operating Results”) for each
Calendar Quarter no later than the forty-fifth (45th) day after the end of each Calendar
Quarter and such announcement shall include the amount of the Company’s LTM Tested Revenues,
Quarterly Revenues and Gross Margin. On the date of such announcement, the Company shall also
provide to the Holders a certification, executed on behalf of the Company by its Chief Financial
Officer, as to the amount of the LTM Tested Revenues, Quarterly Revenues and Gross Margin as of the
end of, and for, the Calendar Quarter to which such Operating Results relate.



(f) SoftScan Approval. The Company shall have submitted for SoftScan’s regulatory
approval by June 30, 2006 with the appropriate health regulatory authority in Canada or the United
States of America.



(16) 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 Shares to the same
extent as if the Holder had converted this Note into Common Shares (without regard to any
limitations on conversion herein or elsewhere) and had held such Common Shares 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 Shares. Notwithstanding
the foregoing, nothing in this Section 16 shall be deemed to prevent the Company from accruing
dividends (which dividends remain unpaid) on any preferred shares of the Company.



(17) VOTE TO ISSUE, OR 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.



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



(19) 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 19(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 19(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 19(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 19(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 19(a) or Section 19(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 on the Principal and Interest of this Note, from the Issuance Date.



(20) 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.



(21) 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.



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



(23) 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.



(24) 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 or the Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within one (1) Trading 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) Trading Day of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall, within one Trading
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 or the 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) Trading 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. In the event the Company’s determination or
calculation is correct, the expenses of the investment bank or accountant, as the case may be,
shall be borne by the Holder.



(25) NOTICES; CURRENCY; TAXES; PAYMENTS.



(a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of
all actions taken pursuant to this Note, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the foregoing, the Company
will give written notice to the Holder (i) immediately upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at
least 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 Shares, (B) with respect to any pro
rata subscription offer to holders of Common Shares 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) Currency. All principal, interest and other amounts owing under this Note or any
Transaction Document that, in accordance with their terms, are paid in cash shall be paid in US
dollars. All amounts denominated in other currencies shall be converted in the US dollar
equivalent amount in accordance with the Exchange Rate on the date of calculation. “Exchange Rate”
means, in relation to any amount of currency to be converted into US dollars pursuant to this Note,
the US dollar exchange rate as published in the Wall Street Journal on the relevant date of
calculation (it being understood and agreed that where an amount is calculated with reference to,
or over, a period of time, the date of calculation shall be the final date of such period of time).



(c) Taxes.



(i) Any and all payments by the Company hereunder, including any amounts received on a
conversion or redemption of the Note and any amounts on account of interest or deemed interest,
shall be made free and clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto,
imposed under Part XIII of the Income Tax Act (Canada) (collectively referred to as “Part XIII
Taxes”). If the Company shall be required to deduct any Part XIII Taxes from or in respect of any
sum payable hereunder to the Holder, (i) the sum payable shall be increased by one-half of the
amount by which the sum payable would otherwise have to be increased (the “make-whole amount”) to
ensure that after making all required deductions (including deductions applicable to the make-whole
amount) the Holder would receive an amount equal to the sum it would have received had no such
deductions been made, (ii) the Company shall make such deductions and (iii) the Company shall pay
the full amount withheld or deducted to the Canada Revenue Agency within the time required. For
example, assuming that the Company is required to deduct 25% of a $100 interest payment hereunder,
the Company shall be required to increase such payment by $16.67.



(ii) In addition, the Company agrees to pay to the relevant governmental authority in
accordance with applicable law any present or future stamp or documentary taxes or any other excise
or property taxes, charges or similar levies that arise from any payment made hereunder or in
connection with the execution, delivery, registration or performance of, or otherwise with respect
to, this Note (“Other Taxes”). The Company shall deliver to the Holder official receipts, if any,
in respect of any Part XIII Taxes and Other Taxes payable hereunder promptly after payment of such
Part XIII Taxes, Other Taxes or other evidence of payment reasonably acceptable to the Holder.



(iii) The obligations of the Company under this Section 25(c) shall survive the termination of
this Note and the payment of the Note and all other amounts payable hereunder.



(d) 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 Trading Day, the
same shall instead be due on the next succeeding day which is a Trading 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.



(26) 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.



(27) 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.



(28) GOVERNING LAW. 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. Any action brought by either party against the other concerning the
transactions contemplated by this Agreement shall be brought only in the state courts of New York
or in the federal courts located in the State of New York and waive trial by jury. Both parties
agree to submit to the jurisdiction of such courts. The prevailing party shall be entitled to
recover from the other party its reasonable attorney’s fees and costs. In the event that any
provision of this Note is invalid or unenforceable under any applicable statute or rule of law,
then such provision shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such provision which may
prove invalid or unenforceable under any law shall not affect the validity or enforceability of any
other provision of this Note. 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.



(29) JUDGMENT CURRENCY.



(a) If for the purpose of obtaining or enforcing judgment against the Company in any court in
any jurisdiction it becomes necessary to convert into any other currency (such other currency being
hereinafter in this Section (29) referred to as the “Judgment Currency”) an amount due in US
dollars under this Note, the conversion shall be made at the Exchange Rate prevailing on the
business day immediately preceding:



(i) the date actual payment of the amount due, in the case of any proceeding in the courts of
New York or in the courts of any other jurisdiction that will give effect to such conversion being
made on such date: or



(ii) the date on which the foreign court determines, in the case of any proceeding in the
courts of any other jurisdiction (the date as of which such conversion is made pursuant to this
Section (29)(a)(ii) being hereinafter referred to as the “Judgment Conversion Date”).



(b) If in the case of any proceeding in the court of any jurisdiction referred to in Section
(29)(a)(ii) above, there is a change in the Exchange Rate prevailing between the Judgment
Conversion Date and the date of actual payment of the amount due, the applicable party shall pay
such adjusted amount as may be necessary to ensure that the amount paid in the Judgment Currency,
when converted at the Exchange Rate prevailing on the date of payment, will produce the amount of
US dollars which could have been purchased with the amount of Judgment Currency stipulated in the
judgment or judicial order at the Exchange Rate prevailing on the Judgment Conversion Date.



(c) Any amount due from the Company under this provision shall be due as a separate debt and
shall not be affected by judgment being obtained for any other amounts due under or in respect of
this Note.



(30) MAXIMUM PAYMENTS. Nothing contained herein shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the maximum permitted by
applicable law. In the event that the rate of interest required to be paid or other charges
hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Company to the Holder and thus refunded to the Company.



(31) 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 approved by the Board
of Directors of the Company, pursuant to which the Company’s securities may be issued to any
employee, officer or director for services provided to the Company.



(b) "Bloomberg” means Bloomberg Financial Markets.



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



(d) "Cash Balance” means, at any date, an amount equal to the aggregate amount of cash and
cash equivalents (not including restricted cash) and short term investments shown or reflected on
the Company’s balance sheet as at such date, in each case only to the extent such cash, cash
equivalents and short term investments are on deposit in each “Deposit Account” at United States
and Canadian banks pledged to the “Collateral Agent” and constituting “Collateral” under (and as
such terms and defined in the “Pledge and Security Agreement” (as defined in the Securities
Purchase Agreement).



(e) "Cash Balance Threshold” means an amount equal to $3,000,000; provided, however, that at
such time as the aggregate principal amount outstanding under the Notes is less than $3,000,000,
such amount shall be reduced by $1 for each $1 that such aggregate principal amount is below
$3,000,000.



(f) "Change of Control” means any Fundamental Transaction other than (A) a Fundamental
Transaction (including any reorganization, recapitalization or reclassification) in which holders
of the Company’s voting power immediately prior to the Fundamental Transaction continue after the
Fundamental Transaction 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 and
whereby following the consummation of any such Fundamental Transaction the security arrangements
referenced in Section 10 continue in existence or (B) pursuant to a migratory merger effected
solely for the purpose of changing the jurisdiction of incorporation of the Company.



(g) "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 by the Principal Market, 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 by the Principal
Market, 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 by the Principal Market, 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 by the
Principal Market, or, if no closing bid price or last trade price, respectively, is reported for
such security by Bloomberg or by the Principal Market, 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 24. All such determinations to be appropriately
adjusted for any share dividend, share split, share combination or other similar transaction during
the applicable calculation period.



(h) "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.



(i) "Company Conversion Price” means, the lower of (i) with respect to any Installment Date,
that price which shall be computed as 90% of the arithmetic average of the Weighted Average Price
of the Common Shares on each of the ten (10) consecutive Trading Days commencing one (1) Trading
Day after the Installment Notice Due Date and ending on the Trading Day immediately preceding the
applicable Installment Date (such period, a “Company Conversion Measuring Period”) and (ii) the
applicable Conversion Price. All such determinations to be appropriately adjusted for any share
split, share dividend, share combination or other similar transaction that proportionately
decreases or increases the Common Shares during the applicable Company Conversion Measuring Period.



(j) "Convertible Securities” means any shares or securities (other than Options) directly or
indirectly convertible into or exercisable or exchangeable for Common Shares.



(k) "Effectiveness Time” means November 28, 2005.



(l) "Eligible Market” means the Principal Market, The New York Stock Exchange, Inc., the
American Stock Exchange, the Nasdaq National Market or The Nasdaq SmallCap Market.



(m) "Equity Conditions” means that each of the following conditions is satisfied: (i) on each
day during the period beginning one (1) month prior to the applicable date of determination and
ending on and including the applicable date of determination (the “Equity Conditions Measuring
Period”), all Common Shares issuable upon conversion of the Notes, payment of Installment Amounts
and exercise of the Warrants 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 Shares are listed on the Principal 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
minimum listing maintenance requirements of such exchange or market; (iii) during the Equity
Conditions Measuring Period the Company shall have delivered any Conversion Shares to be delivered
upon conversion of the Notes and Warrant Shares upon exercise of the Warrants to the holders on a
timely basis as set forth in Section 2(c)(ii) hereof (and analogous provisions under the Other
Notes) and Section 2(a) of the Warrants; (iv) any applicable Common Shares 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; (v) during the Equity Conditions
Measuring Period, the Company shall not have failed to timely make any payments within five (5)
Trading Days of when such payment is due pursuant to any Transaction Document; (vi) during the
Equity Conditions Measuring Period, there shall not have occurred either (A) the public
announcement of a pending, proposed or intended Fundamental Transaction which has not been
abandoned, terminated or consummated or (B) an Event of Default; (vii) during the period commencing
on the Interest Notice Due Date, the Installment Notice Due Date, or the Mandatory Conversion
Notice Date, as applicable, and ending on the Interest Date, the Installment Date, or the Mandatory
Conversion Date, as applicable, an event that with the passage of time or giving of notice would
constitute an Event of Default; (viii) the Company shall have no knowledge of any fact that would
cause any Common Shares issuable upon conversion of the Notes, payment of Interest and Installment
Amounts and upon exercise of the Warrants not to be eligible for sale without restriction pursuant
to Rule 144(k) and any applicable state securities laws; (ix) the Company otherwise shall have been
in material compliance with and shall not have materially breached any provision, covenant,
representation or warranty of any Transaction Document; and (x) the Weighted Average Price of the
Common Shares shall not fall below $0.50.



(n) "Excluded Securities” means any Common Shares issued or issuable: (i) in connection with
any Approved Stock Plan; (ii) upon issuance of any Additional Notes (as defined in the Securities
Purchase Agreement); (iii) upon conversion of the Notes (including any Additional Notes) or the
exercise of the Warrants; (iv) pursuant to a bona fide firm commitment underwritten public offering
with a nationally recognized underwriter which generates gross proceeds to the Company in excess of
$5,000,000 (other than an “at-the-market offering” as defined in Rule 415(a)(4) under the 1933 Act
and “equity lines”); (v) in connection with the payment of any Interest Shares on the Notes; (vi)
in connection with any acquisition by the Company, whether through an acquisition of shares or a
merger of any business, assets or technologies the primary purpose of which is not to raise equity
capital in an amount not to exceed, in the aggregate, 20% of the outstanding Common Shares in any
calendar year; (vii) in connection with any other strategic transaction or alliance (including a
private placement with a strategic investor) the primary purpose of which is not to raise equity
capital; and (viii) upon conversion of any Options or Convertible Securities which are outstanding
on the day immediately preceding the Subscription Date, provided that the terms of such Options or
Convertible Securities are not amended, modified or changed on or after the Subscription Date.



(o) "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 (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 the 50% of the outstanding Common Shares (not including any Common Shares 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 share 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 Common Shares (not including any Common Shares 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 share purchase agreement or other business combination), or (v) reorganize,
recapitalize or reclassify its Common Shares. For the avoidance of doubt, and notwithstanding the
foregoing, the Company may create new Subsidiaries, including trusts the sole trustees of which are
members of the Company’s Board of Directors, and transfer any assets of any kind or nature to
either its existing Subsidiaries or to any new Subsidiaries, and neither the creation of any such
new Subsidiaries nor the transfer of assets to existing or new Subsidiaries shall be deemed a
Fundamental Transaction so long as, concurrently with any such transactions, the Company causes
such existing Subsidiaries or new Subsidiaries to grant a security interest and/or hypothec in
accordance with the security arrangements referenced in Section 10 to the extent required.



(p) "GAAP” means Canadian generally accepted accounting principles, consistently applied.



(q) "Gross Margin” means the amount set forth in the line item entitled “Gross Margin” in the
Company’s publicly available financial statements, as prepared in accordance with GAAP.



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



(s) "Installment Amount” means, with respect to any Installment Date, the lesser of (i) the
product of (A) $625,000, multiplied by (B) the Holder Pro Rata Amount and (ii) the
Principal amount (plus any accrued and unpaid interest thereon) under this Note as of such
Installment Date, as any such Installment Amount may be reduced pursuant to the terms of this Note,
whether upon conversion, redemption or otherwise.



(t) "Installment Date” means the tenth day of each of the eight (8) consecutive Calendar
Quarters commencing on January 10, 2006 and ending on October 10, 2007.



(u) "Installment Notice Due Date” means the twelfth (12th) Trading Day prior to
each Installment Date.



(v) "Interest Conversion Price” means, with respect to any Interest Date, that price which
shall be computed as 90% of the arithmetic average of the Weighted Average Price of the Common
Shares on each of the ten (10) consecutive Trading Days commencing one (1) Trading Day after the
Interest Notice Due Date and ending on the Trading Day immediately preceding the applicable
Interest Date (each, an “Interest Measuring Period”). All such determinations to be appropriately
adjusted for any share split, share dividend, share combination or other similar transaction during
such period.



(w) "Interest Notice Due Date” means the twelfth (12th) Trading Day prior to each
Interest Date.



(x) "Interest Rate” means, initially, nine percent (9.0%) per annum, subject to adjustment at
the beginning of each Calendar Quarter (with respect to such Calendar Quarter and not the
immediately preceding Calendar Quarter) as follows:



(i) If the Closing Sale Price of the Common Shares exceeds 125% of the Conversion Price on the
Issuance Date (subject to appropriate adjustments for share splits, share dividends, share
combinations and other similar transactions after the Subscription Date) for each of the last
twenty (20) consecutive Trading Days for the immediately preceding Calendar Quarter, then the
Interest Rate shall equal eight percent (8%);



(ii) If the Closing Sale Price of the Common Shares is less than 75% of the Conversion Price
on the Issuance Date (subject to appropriate adjustments for share splits, share dividends, share
combinations and other similar transactions after the Subscription Date) for each of the last
twenty (20) consecutive Trading Days for the immediately preceding Calendar Quarter, then the
Interest Rate shall equal ten percent (10%); and



(iii) If the Closing Sale Price of the Common Shares equals or exceeds 75% but is less than or
equal to 125% of the Conversion Price on the Issuance Date (subject to appropriate adjustments for
share splits, share dividends, share combinations and other similar transactions after the
Subscription Date) for each of the last twenty (20) consecutive Trading Days for the immediately
preceding Calendar Quarter, then the Interest Rate shall equal nine percent (9%),



in each case as may be further adjusted in accordance with Section 2.



(y) "LTM Tested Revenues” means the Revenues of the Company and its Subsidiaries for the most
recent twelve month period for which financials are publicly available.



(z) "LTM Tested Revenues Threshold” means an amount equal to $4,000,000.



(aa) "Measuring Period” means any of the Interest Measuring Period or Company Conversion
Measuring Period, as applicable.



(bb) "Options” means any rights, warrants or options to subscribe for or purchase Common
Shares or Convertible Securities.



(cc) "Parent Entity” of a Person means an entity that, directly or indirectly, controls the
applicable Person.



(dd) "Permitted Indebtedness” means (A) Indebtedness incurred by the Company that is made
expressly subordinate in right of payment to the Indebtedness evidenced by this Note, as reflected
in a written subordination agreement acceptable to the Holder and approved by the Holder in writing
(such approval not to be unreasonably withheld), and which Indebtedness does not provide at any
time for (1) the payment, prepayment, repayment, repurchase or defeasance, directly or indirectly,
of any principal or premium, if any, thereon until ninety-one (91) days after the Maturity Date or
later and (2) total interest and fees at a rate in excess of eight percent (8%) per annum, (B)
Indebtedness secured by Permitted Liens, (C) Indebtedness to trade creditors incurred in the
ordinary course of business, and (D) extensions, refinancings and renewals of any items of
Permitted Indebtedness, provided that the principal amount is not increased or the terms modified
to impose more burdensome terms upon the Company or its Subsidiary, as the case may be.



(ee) "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 securing the Company’s obligations under the Notes, (v) Liens (A) upon or in any equipment
(as defined in the Security Agreement) 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, (vi) Liens incurred in connection with
the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in
clauses (i) and (vi) 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, (vii) 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, (viii) 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, (ix) Liens arising
from judgments, decrees or attachments in circumstances not constituting an Event of Default under
Section 4(a)(ix), (x) Liens presently existing in favor of Timex Realty Corp. and Société
Immobilière Technologique de Montréal Inc., granted by the Company as security in connection with
real property leases for premises leased by the Company corresponding to civic addresses 5897
St-Francois Street, St-Laurent, Quebec and 2300 Alfred-Nobel Street, St-Laurent, Quebec,
respectively, provided that the amount of the charge created in virtue of such Liens shall not at
any time exceed $550,000 in the aggregate, (xi) Liens that are expressly subordinate to the Liens
described in clause (iv) above, as reflected in a written agreement acceptable to the Holder and
approved by the Holder in writing.



(ff) "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.



(gg) "Present Value of Interest” means the amount of any interest that, but for a Mandatory
Conversion, would have accrued under this Note at the Interest Rate for the period from the
Mandatory Conversion Date through the Maturity Date discounted to the present value of such
interest using a discount rate equal to the Interest Rate in effect on the applicable date of
determination.



(hh) "Principal Market” means the Toronto Stock Exchange.



(ii) "Quarterly Revenues” means the Revenues of the Company and its Subsidiaries for each
Calendar Quarter.



(jj) "Quarterly Revenues Threshold” means (i) for each of the first two Calendar Quarters
following the Issuance Date, Quarterly Revenues equal to $600,000 and (ii) for each Calendar
Quarter thereafter, Quarterly Revenues equal to $700,000.



(kk) "Redemption Premium” means (i) in the case of the Events of Default described in Section
4(a)(i) — (vi) and (ix) — (xii), 120% or (ii) in the case of the Events of Default described in
Section 4(a)(vii) — (viii), 100%.



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



(mm) "Revenues” means the amount set forth in the line item entitled “Sales” in the Company’s
publicly available financial statements, as prepared in accordance with GAAP.



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



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



(pp) "Subscription Date” means July 28, 2005.



(qq) "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.



(rr) "Tested Gross Margin Threshold” means (i) for each of the first two Calendar Quarters
following the Issuance Date, a Gross Margin equal to 20% of Revenues for the applicable Calendar
Quarter, (ii) for the succeeding three Calendar Quarters, a Gross Margin equal to 25% of Revenues
for the applicable Calendar Quarter and (iii) for each Calendar Quarter thereafter, a Gross Margin
equal to 30% of Revenues for the applicable Calendar Quarter.



(ss) "Trading Day” means any day on which the Common Shares is traded on the Principal Market,
or, if the Principal Market is not the principal trading market for the Common Shares, then on the
principal securities exchange or securities market on which the Common Shares is then traded;
provided that “Trading Day” shall not include any day on which the Common Shares is scheduled to
trade on such exchange or market for less than 4.5 hours or any day that the Common Shares 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).



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



(uu) "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 by the Principal Market, 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 by the Principal Market, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg or by the Principal
Market 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 24. All such
determinations to be appropriately adjusted for any share dividend, share split, share combination
or other similar transaction during the applicable calculation period.



[Signature Page Follows]




1



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



	 
	 

	ART Advanced Research Technologies Inc.

	 

	 

	 

	By:

	Name:

	Title:







2




EXHIBIT I




ART ADVANCED RESEARCH TECHNOLOGIES INC.




CONVERSION NOTICE




Reference is made to the Senior Secured Convertible Note (the “Note”) issued to the undersigned by
ART Advanced Research Technologies 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 Common Shares no par value per share (the “Common Shares”) 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 Common Shares to be issued:

	 

	Notwithstanding anything to the contrary contained herein, this Conversion

Notice shall constitute a representation by the undersigned that, after giving

effect to the conversion provided for in this Conversion Notice, the

undersigned (together with its affiliates) will not have beneficial ownership

(together with the beneficial ownership of such Person’s affiliates) of a

number of Common Shares which exceeds the Maximum Percentage.

Please issue the Common Shares 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)







3




ACKNOWLEDGMENT




The Company hereby acknowledges this Conversion Notice and hereby directs National Bank Trust
to issue the above indicated number of Common Shares in accordance with the Transfer Agent
Instructions dated July 28, 2005 from the Company and acknowledged and agreed to by National Bank
Trust.



	 
	 

	ART Advanced Research Technologies Inc.

	 

	 

	 

	By:

	 

	 

	 

	Name:

	 

	 

	 

	Title:

	 








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