in that certain Securities Purchase Agreement dated the date hereof, pursuant to which this Notewas originally issued (the “Purchase Agreement”).This Note is free from all taxes, liens, claims and encumbrances with respect to the issue thereofand shall not be subject to preemptive rights or other similar rights of shareholders of theBorrower and will not impose personal liability upon the holder thereof.     The following terms shall apply to this Note:ARTICLE I. CONVERSION RIGHTS1.1 Conversion Right. The Holder shall have the right from time to time, and at any time onor prior to the later of (i) the Maturity Date and (ii) the date of payment of the Default Amount(as defined in Article III) pursuant to Section 1.6(a) or Article III, each in respect of theremaining outstanding principal amount of this Note to convert all or any part of the outstandingand unpaid principal amount of this Note into fully paid and non- assessable shares of CommonStock, as such Common Stock exists on the Issue Date, or any shares of capital stock or othersecurities of the Borrower into which such Common Stock shall hereafter be changed or reclassifiedat the conversion price (the “Conversion Price”) determined as provided herein (a “Conversion”);provided, however, that in no event shall the Holder be entitled to convert anyportion of this Note in excess of that portion of this Note upon conversion of which the sum of (1)the number of shares of Common Stock beneficially owned by the Holder and its affiliates (otherthan shares of Common Stock which may be deemed beneficially owned through the ownership of theunconverted portion of the Notes or the unexercised or unconverted portion of any other security ofthe Borrower subject to a limitation on conversion or exercise analogous to the limitationscontained herein) and (2) the number of shares of Common Stock issuable upon the conversion of theportion of this Note with respect to which the determination of this proviso is being made, wouldresult in beneficial ownership by the Holder and its affiliates of more than 4.99% of theoutstanding shares of Common Stock. For purposes of the proviso to the immediately precedingsentence, beneficial ownership shall be determined in accordance with Section 13(d) of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), and Regulations 13D-G thereunder,except as otherwise provided in clause (1) of such proviso, provided, further,however, that the limitations on conversion may be waived by the Holder upon, at theelection of the Holder, not less than 61 days’ prior notice to the Borrower, and the provisions ofthe conversion limitation shall continue to apply until such 61st day (or such later date, asdetermined by the Holder, as may be specified in such notice of waiver).. The number of shares ofCommon Stock to be issued upon each conversion of this Note shall be determined by dividing theConversion Amount (as defined below) by the applicable Conversion Price then in effect on the datespecified in the notice of conversion, in the form attached hereto as Exhibit A (the “Notice ofConversion”), delivered to the Borrower by the Holder in accordance with Section 1.4 below;provided that the Notice of Conversion is submitted by facsimile (or by other means resulting in,or reasonably expected to result in, notice) to the Borrower before 6:00 p.m., New York, New Yorktime on such conversion date (the “Conversion Date”). The term “Conversion Amount” means, withrespect to any conversion of this Note, the sum of (1) the principal amount of this Note to beconverted in such conversion plus (2) at the Borrower’s option, accrued and unpaidinterest, if any, on such
 

 
principal amount at the interest rates provided in this Note to the Conversion Date, provided,however, that the Company shall have the right to pay any or all interest in cash plus (3)at the Borrower’s option, Default Interest, if any, on the amounts referred to in the immediatelypreceding clauses (1) and/or (2) plus (4) at the Holder’s option, any amounts owed to theHolder pursuant to Sections 1.3 and 1.4(g) hereof.          1.2 Conversion Price.(a) Calculation of Conversion Price. The conversion price (the “Conversion Price”) shallequal the Variable Conversion Price (as defined herein)(subject to equitable adjustments for stocksplits, stock dividends or rights offerings by the Borrower relating to the Borrower’s securitiesor the securities of any subsidiary of the Borrower, combinations, recapitalization,reclassifications, extraordinary distributions and similar events). The “Variable Conversion Price”shall mean the Applicable Percentage (as defined herein) multiplied by the Market Price (as definedherein). “Market Price” means the average of the lowest three (3) Trading Prices (as definedbelow) for the Common Stock during the ten (10) Trading Day period ending one Trading Day prior tothe date the Conversion Notice is sent by the Holder to the Borrower via facsimile (the “ConversionDate”). “Trading Price” means, for any security as of any date, the closing bid price on theOver-the-Counter Bulletin Board, or applicable trading market (the “OTCBB”) as reported by areliable reporting service (“Reporting Service”) mutually acceptable to Borrower and Holder andhereafter designated by Holders of a majority in interest of the Notes and the Borrower or, if theOTCBB is not the principal trading market for such security, the closing bid price of such securityon the principal securities exchange or trading market where such security is listed or traded or,if no closing bid price of such security is available in any of the foregoing manners, the averageof the closing bid prices of any market makers for such security that are listed in the “pinksheets” by the National Quotation Bureau, Inc. If the Trading Price cannot be calculated for suchsecurity on such date in the manner provided above, the Trading Price shall be the fair marketvalue as mutually determined by the Borrower and the holders of a majority in interest of the Notesbeing converted for which the calculation of the Trading Price is required in order to determinethe Conversion Price of such Notes. “Trading Day” shall mean any day on which the Common Stock istraded for any period on the OTCBB, or on the principal securities exchange or other securitiesmarket on which the Common Stock is then being traded. “Applicable Percentage” shall mean 58%.(b) Conversion Price During Major Announcements. Notwithstanding anything contained inSection 1.2(a) to the contrary, in the event the Borrower (i) makes a public announcement that itintends to consolidate or merge with any other corporation (other than a merger in which theBorrower is the surviving or continuing corporation and its capital stock is unchanged) or sell ortransfer all or substantially all of the assets of the Borrower or (ii) any person, group or entity(including the Borrower) publicly announces a tender offer to purchase 50% or more of theBorrower’s Common Stock (or any other takeover scheme) (the date of the announcement referred to inclause (i) or (ii) is hereinafter referred to as the “Announcement Date”), then the ConversionPrice shall, effective upon the Announcement Date and continuing through the Adjusted ConversionPrice Termination Date (as defined below), be equal to the lower of (x) the Conversion Price whichwould have been applicable for a Conversion occurring
 

 
on the Announcement Date and (y) the Conversion Price that would otherwise be in effect. From andafter the Adjusted Conversion Price Termination Date, the Conversion Price shall be determined asset forth in this Section 1.2(a). For purposes hereof, “Adjusted Conversion Price Termination Date”shall mean, with respect to any proposed transaction or tender offer (or takeover scheme) for whicha public announcement as contemplated by this Section 1.2(b) has been made, the date upon which theBorrower (in the case of clause (i) above) or the person, group or entity (in the case of clause(ii) above) consummates or publicly announces the termination or abandonment of the proposedtransaction or tender offer (or takeover scheme) which caused this Section 1.2(b) to becomeoperative.1.3 Authorized Shares. The Borrower covenants that during the period the conversion rightexists, the Borrower will reserve from its authorized and unissued Common Stock a sufficient numberof shares, free from preemptive rights, to provide for the issuance of Common Stock upon the fullconversion of this Note issued pursuant to the Purchase Agreement. The Borrower is required at alltimes to have authorized and reserved three times the number of shares that is actually issuableupon full conversion of the Note (based on the Conversion Price of the Notes in effect from time totime)(the “Reserved Amount”). The Reserved Amount shall be increased from time to time inaccordance with the Borrower’s obligations pursuant to Section 4(g) of the Purchase Agreement. TheBorrower represents that upon issuance, such shares will be duly and validly issued, fully paid andnon-assessable. In addition, if the Borrower shall issue any securities or make any change to itscapital structure which would change the number of shares of Common Stock into which the Notesshall be convertible at the then current Conversion Price, the Borrower shall at the same time makeproper provision so that thereafter there shall be a sufficient number of shares of Common Stockauthorized and reserved, free from preemptive rights, for conversion of the outstanding Notes. TheBorrower (i) acknowledges that it has irrevocably instructed its transfer agent to issuecertificates for the Common Stock issuable upon conversion of this Note, and (ii) agrees that itsissuance of this Note shall constitute full authority to its officers and agents who are chargedwith the duty of executing stock certificates to execute and issue the necessary certificates forshares of Common Stock in accordance with the terms and conditions of this Note.If, at any time a Holder of this Note submits a Notice of Conversion, and the Borrower does nothave sufficient authorized but unissued shares of Common Stock available to effect such conversionin accordance with the provisions of this Article I (a “Conversion Default”), the Borrower shallissue to the Holder all of the shares of Common Stock which are then available to effect suchconversion. The portion of this Note which the Holder included in its Conversion Notice and whichexceeds the amount which is then convertible into available shares of Common Stock (the “ExcessAmount”) shall, notwithstanding anything to the contrary contained herein, not be convertible intoCommon Stock in accordance with the terms hereof until (and at the Holder’s option at any timeafter) the date additional shares of Common Stock are authorized by the Borrower to permit suchconversion, at which time the Conversion Price in respect thereof shall be the lesser of (i) theConversion Price on the Conversion Default Date (as defined below) and (ii) the Conversion Price onthe Conversion Date thereafter elected by the Holder in respect thereof. In addition, the Borrowershall pay to the Holder payments (“Conversion Default Payments”) for a Conversion Default in theamount of (x) the sum of (1) the then outstanding principal amount of this Noteplus (2) accrued and unpaid interest on the
 

 
unpaid principal amount of this Note through the Authorization Date (as defined below) plus(3) Default Interest, if any, on the amounts referred to in clauses (1) and/or (2), multipliedby (y) .24, multiplied by (z) (N/365), where N = the number of days from the day theholder submits a Notice of Conversion giving rise to a Conversion Default (the “Conversion DefaultDate”) to the date (the “Authorization Date”) that the Borrower authorizes a sufficient number ofshares of Common Stock to effect conversion of the full outstanding principal balance of this Note.The Borrower shall use its best efforts to authorize a sufficient number of shares of Common Stockas soon as practicable following the earlier of (i) such time that the Holder notifies the Borroweror that the Borrower otherwise becomes aware that there are or likely will be insufficientauthorized and unissued shares to allow full conversion thereof and (ii) a Conversion Default. TheBorrower shall send notice to the Holder of the authorization of additional shares of Common Stock,the Authorization Date and the amount of Holder’s accrued Conversion Default Payments. The accruedConversion Default Payments for each calendar month shall be paid in cash or shall be convertibleinto Common Stock (at such time as there are sufficient authorized shares of Common Stock) at theapplicable Conversion Price, at the Borrower’s option, as follows:(a) In the event Holder elects to take such payment in cash, cash payment shall be made to Holderby the fifth (5th) day of the month following the month in which it hasaccrued; and(b) In the event Holder elects to take such payment in Common Stock, the Holder may convert suchpayment amount into Common Stock at the Conversion Price (as in effect at the time of conversion)at any time after the fifth day of the month following the month in which it has accrued inaccordance with the terms of this Article I (so long as there is then a sufficient number ofauthorized shares of Common Stock).The Holder’s election shall be made in writing to the Borrower at any time prior to 6:00 p.m., NewYork, New York time, on the third day of the month following the month in which Conversion Defaultpayments have accrued. If no election is made, the Holder shall be deemed to have elected toreceive cash. Nothing herein shall limit the Holder’s right to pursue actual damages (to theextent in excess of the Conversion Default Payments) for the Borrower’s failure to maintain asufficient number of authorized shares of Common Stock, and each holder shall have the right topursue all remedies available at law or in equity (including degree of specific performance and/orinjunctive relief).          1.4 Method of Conversion.     (a) Mechanics of Conversion. Subject to Section 1.1, this Note may be converted by theHolder in whole or in part at any time from time to time after the Issue Date, by (A) submitting tothe Borrower a Notice of Conversion (by facsimile or other reasonable means of communicationdispatched on the Conversion Date prior to 6:00 p.m., New York, New York time) and (B) subject toSection 1.4(b), surrendering this Note at the principal office of the Borrower.
 

 
     (b) Surrender of Note Upon Conversion. Notwithstanding anything to the contrary setforth herein, upon conversion of this Note in accordance with the terms hereof, the Holder shallnot be required to physically surrender this Note to the Borrower unless the entire unpaidprincipal amount of this Note is so converted. The Holder and the Borrower shall maintain recordsshowing the principal amount so converted and the dates of such conversions or shall use such othermethod, reasonably satisfactory to the Holder and the Borrower, so as not to require physicalsurrender of this Note upon each such conversion. In the event of any dispute or discrepancy, suchrecords of the Borrower shall, *prima facie,*be controlling and determinative in the absence ofmanifest error. Notwithstanding the foregoing, if any portion of this Note is converted asaforesaid, the Holder may not transfer this Note unless the Holder first physically surrenders thisNote to the Borrower, whereupon the Borrower will forthwith issue and deliver upon the order of theHolder a new Note of like tenor, registered as the Holder (upon payment by the Holder of anyapplicable transfer taxes) may request, representing in the aggregate the remaining unpaidprincipal amount of this Note. The Holder and any assignee, by acceptance of this Note, acknowledgeand agree that, by reason of the provisions of this paragraph, following conversion of a portion ofthis Note, the unpaid and unconverted principal amount of this Note represented by this Note may beless than the amount stated on the face hereof.     (c) Payment of Taxes. The Borrower shall not be required to pay any tax which may bepayable in respect of any transfer involved in the issue and delivery of shares of Common Stock orother securities or property on conversion of this Note in a name other than that of the Holder (orin street name), and the Borrower shall not be required to issue or deliver any such shares orother securities or property unless and until the person or persons (other than the Holder or thecustodian in whose street name such shares are to be held for the Holder’s account) requesting theissuance thereof shall have paid to the Borrower the amount of any such tax or shall haveestablished to the satisfaction of the Borrower that such tax has been paid.     (d) Delivery of Common Stock Upon Conversion. Upon receipt by the Borrower from theHolder of a facsimile transmission (or other reasonable means of communication) of a Notice ofConversion meeting the requirements for conversion as provided in this Section 1.4, the Borrowershall issue and deliver or cause to be issued and delivered to or upon the order of the Holdercertificates for the Common Stock issuable upon such conversion within three (3) business daysafter such receipt (and, solely in the case of conversion of the entire unpaid principal amounthereof, surrender of this Note) (such third business day being hereinafter referred to as the“Deadline”) in accordance with the terms hereof and the Purchase Agreement (including, withoutlimitation, in accordance with the requirements of Section 2(g) of the Purchase Agreement thatcertificates for shares of Common Stock issued on or after the effective date of the RegistrationStatement upon conversion of this Note shall not bear any restrictive legend).     (e) Obligation of Borrower to Deliver Common Stock. Upon receipt by the Borrower of aNotice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stockissuable upon such conversion, the outstanding principal amount and the amount of accrued andunpaid interest on this Note shall be reduced to reflect such conversion, and, unless the Borrowerdefaults on its obligations under this Article I, all rights with respect to the portion of thisNote being so converted shall forthwith terminate except the
 

 
right to receive the Common Stock or other securities, cash or other assets, as hereinprovided, on such conversion. If the Holder shall have given a Notice of Conversion as providedherein, the Borrower’s obligation to issue and deliver the certificates for Common Stock shall beabsolute and unconditional, irrespective of the absence of any action by the Holder to enforce thesame, any waiver or consent with respect to any provision thereof, the recovery of any judgmentagainst any person or any action to enforce the same, any failure or delay in the enforcement ofany other obligation of the Borrower to the holder of record, or any setoff, counterclaim,recoupment, limitation or termination, or any breach or alleged breach by the Holder of anyobligation to the Borrower, and irrespective of any other circumstance which might otherwise limitsuch obligation of the Borrower to the Holder in connection with such conversion. The ConversionDate specified in the Notice of Conversion shall be the Conversion Date so long as the Notice ofConversion is received by the Borrower before 6:00 p.m., New York, New York time, on such date.     (f) Delivery of Common Stock by Electronic Transfer. In lieu of delivering physicalcertificates representing the Common Stock issuable upon conversion, provided the Borrower’stransfer agent is participating in the Depository Trust Company (“DTC”) Fast Automated SecuritiesTransfer (“FAST”) program, upon request of the Holder and its compliance with the provisionscontained in Section 1.1 and in this Section 1.4, the Borrower shall use its best efforts to causeits transfer agent to electronically transmit the Common Stock issuable upon conversion to theHolder by crediting the account of Holder’s Prime Broker with DTC through its Deposit WithdrawalAgent Commission (“DWAC”) system.     (g) Failure to Deliver Common Stock Prior to Deadline. Without in any way limiting theHolder’s right to pursue other remedies, including actual damages and/or equitable relief, theparties agree that if delivery of the Common Stock issuable upon conversion of this Note is morethan three (3) business days after the Deadline (other than a failure due to the circumstancesdescribed in Section 1.3 above, which failure shall be governed by such Section) the Borrower shallpay to the Holder $2,000 per day in cash, for each day beyond the Deadline that the Borrower failsto deliver such Common Stock. Such cash amount shall be paid to Holder by the fifth day of themonth following the month in which it has accrued or, at the option of the Holder (by writtennotice to the Borrower by the first day of the month following the month in which it has accrued),shall be added to the principal amount of this Note, in which event interest shall accrue thereonin accordance with the terms of this Note and such additional principal amount shall be convertibleinto Common Stock in accordance with the terms of this Note. Notwithstanding anything containedherein to the contrary,1.5 Concerning the Shares. The shares of Common Stock issuable upon conversion of thisNote may not be sold or transferred unless (i) such shares are sold pursuant to an effectiveregistration statement under the Act or (ii) the Borrower or its transfer agent shall have beenfurnished with an opinion of counsel (which opinion shall be in form, substance and scope customaryfor opinions of counsel in comparable transactions) to the effect that the shares to be sold ortransferred may be sold or transferred pursuant to an exemption from such registration or (iii)such shares are sold or transferred pursuant to Rule 144 under the Act (or a successor rule) (“Rule144”) or (iv) such shares are transferred to an “affiliate” (as defined in Rule 144) of theBorrower who agrees to sell or otherwise transfer the shares only in accordance
 

 
with this Section 1.5 and who is an Accredited Investor (as defined in the PurchaseAgreement). Except as otherwise provided in the Purchase Agreement (and subject to the removalprovisions set forth below), until such time as the shares of Common Stock issuable upon conversionof this Note have been registered under the Act or otherwise may be sold pursuant to Rule 144without any restriction as to the number of securities as of a particular date that can then beimmediately sold, each certificate for shares of Common Stock issuable upon conversion of this Notethat has not been so included in an effective registration statement or that has not been soldpursuant to an effective registration statement or an exemption that permits removal of the legend,shall bear a legend substantially in the following form, as appropriate:**“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THESECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIESACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFEREDFOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATIONSTATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OFCOUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THATREGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144AUNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH ABONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”**The legend set forth above shall be removed and the Borrower shall issue to the Holder a newcertificate therefore free of any transfer legend if (i) the Borrower or its transfer agent shallhave received an opinion of counsel, in form, substance and scope customary for opinions of counselin comparable transactions, to the effect that a public sale or transfer of such Common Stock maybe made without registration under the Act and the shares are so sold or transferred, (ii) suchHolder provides the Borrower or its transfer agent with reasonable assurances that the Common Stockissuable upon conversion of this Note (to the extent such securities are deemed to have beenacquired on the same date) can be sold pursuant to Rule 144 or (iii) in the case of the CommonStock issuable upon conversion of this Note, such security is registered for sale by the Holderunder an effective registration statement filed under the Act or otherwise may be sold pursuant toRule 144 without any restriction as to the number of securities as of a particular date that canthen be immediately sold.          1.6 Effect of Certain Events.     (a) Effect of Merger, Consolidation, Etc. At the option of the Holder, the sale,conveyance or disposition of all or substantially all of the assets of the Borrower, theeffectuation by the Borrower of a transaction or series of related transactions in which more than50% of the voting power of the Borrower is disposed of, or the consolidation, merger or otherbusiness combination of the Borrower with or into any other Person (as defined below) or Personswhen the Borrower is not the survivor shall either: (i) be deemed to be an Event of
 

 
Default (as defined in Article III) pursuant to which the Borrower shall be required to pay tothe Holder upon the consummation of and as a condition to such transaction an amount equal to theDefault Amount (as defined in Article III) or (ii) be treated pursuant to Section 1.6(b) hereof.“Person” shall mean any individual, corporation, limited liability company, partnership,association, trust or other entity or organization.     (b) Adjustment Due to Merger, Consolidation, Etc. If, at any time when this Note isissued and outstanding and prior to conversion of all of the Notes, there shall be any merger,consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as aresult of which shares of Common Stock of the Borrower shall be changed into the same or adifferent number of shares of another class or classes of stock or securities of the Borrower oranother entity, or in case of any sale or conveyance of all or substantially all of the assets ofthe Borrower other than in connection with a plan of complete liquidation of the Borrower, then theHolder of this Note shall thereafter have the right to receive upon conversion of this Note, uponthe basis and upon the terms and conditions specified herein and in lieu of the shares of CommonStock immediately theretofore issuable upon conversion, such stock, securities or assets which theHolder would have been entitled to receive in such transaction had this Note been converted in fullimmediately prior to such transaction (without regard to any limitations on conversion set forthherein), and in any such case appropriate provisions shall be made with respect to the rights andinterests of the Holder of this Note to the end that the provisions hereof (including, withoutlimitation, provisions for adjustment of the Conversion Price and of the number of shares issuableupon conversion of the Note) shall thereafter be applicable, as nearly as may be practicable inrelation to any securities or assets thereafter deliverable upon the conversion hereof. TheBorrower shall not affect any transaction described in this Section 1.6(b) unless (a) it firstgives, to the extent practicable, thirty (30) days prior written notice (but in any event at leastfifteen (15) days prior written notice) of the record date of the special meeting of shareholdersto approve, or if there is no such record date, the consummation of, such merger, consolidation,exchange of shares, recapitalization, reorganization or other similar event or sale of assets(during which time the Holder shall be entitled to convert this Note) and (b) the resultingsuccessor or acquiring entity (if not the Borrower) assumes by written instrument the obligationsof this Section 1.6(b). The above provisions shall similarly apply to successive consolidations,mergers, sales, transfers or share exchanges.     (c) Adjustment Due to Distribution. If the Borrower shall declare or make anydistribution of its assets (or rights to acquire its assets) to holders of Common Stock as adividend, stock repurchase, by way of return of capital or otherwise (including any dividend ordistribution to the Borrower’s shareholders in cash or shares (or rights to acquire shares) ofcapital stock of a subsidiary (i.e., a spin-off)) (a “Distribution”), then the Holder of this Noteshall be entitled, upon any conversion of this Note after the date of record for determiningshareholders entitled to such Distribution, to receive the amount of such assets which would havebeen payable to the Holder with respect to the shares of Common Stock issuable upon such conversionhad such Holder been the holder of such shares of Common Stock on the record date for thedetermination of shareholders entitled to such Distribution.
 

 
     (d) Adjustment Due to Dilutive Issuance. If, at any time when any Notes are issued andoutstanding, the Borrower issues or sells, or in accordance with this Section 1.6(d) hereof isdeemed to have issued or sold, except for shares of Common Stock issued directly to vendors orsuppliers of the Borrower in satisfaction of amounts owed to such vendors or suppliers (provided,however, that such vendors or suppliers shall not have an arrangement to transfer, sell or assignsuch shares of Common Stock prior to the issuance of such shares), any shares of Common Stock forno consideration or for a consideration per share (before deduction of reasonable expenses orcommissions or underwriting discounts or allowances in connection therewith) less than theConversion Price in effect on the date of such issuance (or deemed issuance) of such shares ofCommon Stock (a “Dilutive Issuance”), then immediately upon the Dilutive Issuance, the ConversionPrice will be reduced to the amount of the consideration per share received by the Borrower in suchDilutive Issuance.     The Borrower shall be deemed to have issued or sold shares of Common Stock if the Borrower inany manner issues or grants any warrants, rights or options (not including employee stock optionplans), whether or not immediately exercisable, to subscribe for or to purchase Common Stock orother securities convertible into or exchangeable for Common Stock (“Convertible Securities”) (suchwarrants, rights and options to purchase Common Stock or Convertible Securities are hereinafterreferred to as “Options”) and the price per share for which Common Stock is issuable upon theexercise of such Options is less than the Conversion Price then in effect, then the ConversionPrice shall be equal to such price per share. For purposes of the preceding sentence, the “priceper share for which Common Stock is issuable upon the exercise of such Options” is determined bydividing (i) the total amount, if any, received or receivable by the Borrower as consideration forthe issuance or granting of all such Options, plus the minimum aggregate amount of additionalconsideration, if any, payable to the Borrower upon the exercise of all such Options, plus, in thecase of Convertible Securities issuable upon the exercise of such Options, the minimum aggregateamount of additional consideration payable upon the conversion or exchange thereof at the time suchConvertible Securities first become convertible or exchangeable, by (ii) the maximum total numberof shares of Common Stock issuable upon the exercise of all such Options (assuming full conversionof Convertible Securities, if applicable). No further adjustment to the Conversion Price will bemade upon the actual issuance of such Common Stock upon the exercise of such Options or upon theconversion or exchange of Convertible Securities issuable upon exercise of such Options.Additionally, the Borrower shall be deemed to have issued or sold shares of Common Stock if theBorrower in any manner issues or sells any Convertible Securities, whether or not immediatelyconvertible (other than where the same are issuable upon the exercise of Options), and the priceper share for which Common Stock is issuable upon such conversion or exchange is less than theConversion Price then in effect, then the Conversion Price shall be equal to such price per share.For the purposes of the preceding sentence, the “price per share for which Common Stock is issuableupon such conversion or exchange” is determined by dividing (i) the total amount, if any, receivedor receivable by the Borrower as consideration for the issuance or sale of all such ConvertibleSecurities, plus the minimum aggregate amount of additional consideration, if any, payable to theBorrower upon the conversion or exchange thereof at the time such Convertible Securities firstbecome convertible or exchangeable, by (ii) the maximum total number of shares of Common Stockissuable upon
 

 
the conversion or exchange of all such Convertible Securities. No further adjustment to theConversion Price will be made upon the actual issuance of such Common Stock upon conversion orexchange of such Convertible Securities.(e) Purchase Rights. If, at any time when any Notes are issued and outstanding, theBorrower issues any convertible securities or rights to purchase stock, warrants, securities orother property (the “Purchase Rights”) pro rata to the record holders of any class of Common Stock,then the Holder of this Note will be entitled to acquire, upon the terms applicable to suchPurchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holderhad held the number of shares of Common Stock acquirable upon complete conversion of this Note(without regard to any limitations on conversion contained herein) immediately before the date onwhich a record is taken for the grant, issuance or sale of such Purchase Rights or, if no suchrecord is taken, the date as of which the record holders of Common Stock are to be determined forthe grant, issue or sale of such Purchase Rights.(f) Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of theConversion Price as a result of the events described in this Section 1.6, the Borrower, at itsexpense, shall promptly compute such adjustment or readjustment and prepare and furnish to theHolder of a certificate setting forth such adjustment or readjustment and showing in detail thefacts upon which such adjustment or readjustment is based. The Borrower shall, upon the writtenrequest at any time of the Holder, furnish to such Holder a like certificate setting forth (i) suchadjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number ofshares of Common Stock and the amount, if any, of other securities or property which at the timewould be received upon conversion of the Note.1.7 Trading Market Limitations. Unless permitted by the applicable rules and regulations ofthe principal securities market on which the Common Stock is then listed or traded, in no eventshall the Borrower issue upon conversion of or otherwise pursuant to this Note and the other Notesissued pursuant to the Purchase Agreement more than the maximum number of shares of Common Stockthat the Borrower can issue pursuant to any rule of the principal United States securities marketon which the Common Stock is then traded (the “Maximum Share Amount”), which shall be 4.99% of thetotal shares outstanding on the Closing Date (as defined in the Purchase Agreement), subject toequitable adjustment from time to time for stock splits, stock dividends, combinations, capitalreorganizations and similar events relating to the Common Stock occurring after the date hereof.Once the Maximum Share Amount has been issued (the date of which is hereinafter referred to as the“Maximum Conversion Date”), if the Borrower fails to eliminate any prohibitions under applicablelaw or the rules or regulations of any stock exchange, interdealer quotation system or otherself-regulatory organization with jurisdiction over the Borrower or any of its securities on theBorrower’s ability to issue shares of Common Stock in excess of the Maximum Share Amount (a“Trading Market Prepayment Event”), in lieu of any further right to convert this Note, and in fullsatisfaction of the Borrower’s obligations under this Note, the Borrower shall pay to the Holder,within fifteen (15) business days of the Maximum Conversion Date (the “Trading Market PrepaymentDate”), an amount equal to 150% times the sum of (a) the then outstanding principalamount of this Note immediately following the Maximum Conversion Date, plus (b) accrued andunpaid interest on the unpaid principal amount of this Note to the Trading Market Prepayment Date,plus (c)
 

 
Default Interest, if any, on the amounts referred to in clause (a) and/or (b) above, plus(d) any optional amounts that may be added thereto at the Maximum Conversion Date by the Holder inaccordance with the terms hereof (the then outstanding principal amount of this Note immediatelyfollowing the Maximum Conversion Date, plus the amounts referred to in clauses (b), (c) and(d) above shall collectively be referred to as the “Remaining Convertible Amount”). In the eventthat the sum of (x) the aggregate number of shares of Common Stock issued upon conversion of thisNote and the other Notes issued pursuant to the Purchase Agreement plus (y) the aggregatenumber of shares of Common Stock that remain issuable upon conversion of this Note and the otherNotes issued pursuant to the Purchase Agreement, represents at least one hundred percent (100%) ofthe Maximum Share Amount (the “Triggering Event”), the Borrower will use its best efforts to seekand obtain Shareholder Approval (or obtain such other relief as will allow conversions hereunder inexcess of the Maximum Share Amount) as soon as practicable following the Triggering Event andbefore the Maximum Conversion Date. As used herein, “Shareholder Approval” means approval by theshareholders of the Borrower to authorize the issuance of the full number of shares of Common Stockwhich would be issuable upon full conversion of the then outstanding Notes but for the MaximumShare Amount.1.8 Status as Shareholder. Upon submission of a Notice of Conversion by a Holder, (i) theshares covered thereby (other than the shares, if any, which cannot be issued because theirissuance would exceed such Holder’s allocated portion of the Reserved Amount or Maximum ShareAmount) shall be deemed converted into shares of Common Stock and (ii) the Holder’s rights as aHolder of such converted portion of this Note shall cease and terminate, excepting only the rightto receive certificates for such shares of Common Stock and to any remedies provided herein orotherwise available at law or in equity to such Holder because of a failure by the Borrower tocomply with the terms of this Note. Notwithstanding the foregoing, if a Holder has not receivedcertificates for all shares of Common Stock prior to the tenth (10th) business day after theexpiration of the Deadline with respect to a conversion of any portion of this Note for any reason,then (unless the Holder otherwise elects to retain its status as a holder of Common Stock by sonotifying the Borrower) the Holder shall regain the rights of a Holder of this Note with respect tosuch unconverted portions of this Note and the Borrower shall, as soon as practicable, return suchunconverted Note to the Holder or, if the Note has not been surrendered, adjust its records toreflect that such portion of this Note has not been converted. In all cases, the Holder shallretain all of its rights and remedies (including, without limitation, (i) the right to receiveConversion Default Payments pursuant to Section 1.3 to the extent required thereby for suchConversion Default and any subsequent Conversion Default and (ii) the right to have the ConversionPrice with respect to subsequent conversions determined in accordance with Section 1.3) for theBorrower’s failure to convert this Note.1.9 Prepayment. Notwithstanding anything to the contrary contained in this Note, so longas: (i) no Event of Default shall have occurred and be continuing, (ii) the Borrower has asufficient number of authorized shares of Common Stock reserved for issuance upon full conversionof the Note, and (iii) the Borrower has not received a Notice of Conversion from the Holder, thenat any time during the period beginning on the Issue Date and ending on the date prior to theMaturity Date, the Borrower shall have the right, exercisable on notless than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstandingNote (principal and accrued interest), in full, in accordance with this Section 1.9. Any notice of
 

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

 
1.10 Short Sales. During the term of this Note, Holder agrees that is shall not “short” theCommon Stock. “Short” shall mean borrowing Borrower’s Common Stock from a broker and selling it,with the understanding that it must later be bought back and returned to the broker.ARTICLE II. CERTAIN COVENANTS2.1 Distributions on Capital Stock. So long as the Borrower shall have any obligation underthis Note, the Borrower shall not without the Holder’s written consent (a) pay, declare or setapart for such payment, any dividend or other distribution (whether in cash, property or othersecurities) on shares of capital stock other than dividends on shares of Common Stock solely in theform of additional shares of Common Stock or (b) directly or indirectly or through any subsidiarymake any other payment or distribution in respect of its capital stock except for distributionspursuant to any shareholders’ rights plan which is approved by a majority of the Borrower’sdisinterested directors.2.2 Restriction on Stock Repurchases. So long as the Borrower shall have any obligationunder this Note, the Borrower shall not without the Holder’s written consent redeem, repurchase orotherwise acquire (whether for cash or in exchange for property or other securities or otherwise)in any one transaction or series of related transactions any shares of capital stock of theBorrower or any warrants, rights or options to purchase or acquire any such shares.2.3 Borrowings. So long as the Borrower shall have any obligation under this Note, theBorrower shall not, without the Holder’s written consent, create, incur, assume or suffer to existany liability for borrowed money, except (a) borrowings in existence or committed on the datehereof and of which the Borrower has informed Holder in writing prior to the date
 

 
hereof, (b) indebtedness to trade creditors or financial institutions incurred in the ordinarycourse of business or (c) borrowings, the proceeds of which shall be used to repay this Note.2.4 Sale of Assets. So long as the Borrower shall have any obligation under this Note, theBorrower shall not, without the Holder’s written consent, sell, lease or otherwise dispose of anysignificant portion of its assets outside the ordinary course of business. Any consent to thedisposition of any assets may be conditioned on a specified use of the proceeds of disposition.2.5 Advances and Loans. So long as the Borrower shall have any obligation under this Note,the Borrower shall not, without the Holder’s written consent, lend money, give credit or makeadvances to any person, firm, joint venture or corporation, including, without limitation,officers, directors, employees, subsidiaries and affiliates of the Borrower, except loans, creditsor advances (a) in existence or committed on the date hereof and which the Borrower has informedHolder in writing prior to the date hereof, (b) made in the ordinary course of business or (c) notin excess of $100,000.2.6 Contingent Liabilities. So long as the Borrower shall have any obligation under thisNote, the Borrower shall not, without the Holder’s written consent, which shall not be unreasonablywithheld, assume, guarantee, endorse, contingently agree to purchase or otherwise become liableupon the obligation of any person, firm, partnership, joint venture or corporation, except by theendorsement of negotiable instruments for deposit or collection and except assumptions, guarantees,endorsements and contingencies (a) in existence or committed on the date hereof and which theBorrower has informed Holder in writing prior to the date hereof, and(b) similar transactions in the ordinary course of business.ARTICLE III. EVENTS OF DEFAULT     If any of the following events of default (each, an “Event of Default”) shall occur:3.1 Failure to Pay Principal or Interest. The Borrower fails to pay the principal hereof orinterest thereon when due on this Note, whether at maturity, upon a Trading Market Prepayment Eventpursuant to Section 1.7, upon acceleration or otherwise;3.2 Conversion and the Shares. The Borrower fails to issue shares of Common Stock to theHolder (or announces or threatens that it will not honor its obligation to do so) upon exercise bythe Holder of the conversion rights of the Holder in accordance with the terms of this Note, failsto transfer or cause its transfer agent to transfer (electronically or in certificated form) anycertificate for shares of Common Stock issued to the Holder upon conversion of or otherwisepursuant to this Note as and when required by this Note, or fails to remove any restrictive legend(or to withdraw any stop transfer instructions in respect thereof) on any certificate for anyshares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Noteas and when required by this Note (or makes any announcement, statement or threat that it does notintend to honor the obligations described in this paragraph) and any such failure shall continueuncured (or any announcement, statement or threat not to
 

 
honor its obligations shall not be rescinded in writing) for three (3) days after the Borrowershall have been notified thereof in writing by the Holder;3.3 Breach of Covenants. The Borrower breaches any material covenant or other material termor condition contained in this Note and any collateral documents including but not limited to thePurchase Agreement and such breach continues for a period of ten (10) days after written noticethereof to the Borrower from the Holder;3.4 Breach of Representations and Warranties. Any representation or warranty of theBorrower made herein or in any agreement, statement or certificate given in writing pursuant heretoor in connection herewith (including, without limitation, the Purchase Agreement), shall be falseor misleading in any material respect when made and the breach of which has (or with the passage oftime will have) a material adverse effect on the rights of the Holder with respect to this Note orthe Purchase Agreement;3.5 Receiver or Trustee. The Borrower or any subsidiary of the Borrower shall make anassignment for the benefit of creditors, or apply for or consent to the appointment of a receiveror trustee for it or for a substantial part of its property or business, or such a receiver ortrustee shall otherwise be appointed;3.6 Judgments. Any money judgment, writ or similar process shall be entered or filedagainst the Borrower or any subsidiary of the Borrower or any of its property or other assets formore than $50,000, and shall remain unvacated, unbonded or unstayed for a period of twenty (20)days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld;3.7 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or otherproceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for therelief of debtors shall be instituted by or against the Borrower or any subsidiary of the Borrower;3.8 Delisting of Common Stock. The Borrower shall fail to maintain the listing of theCommon Stock on at least one of the OTCBB or an equivalent replacement exchange, the NasdaqNational Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American StockExchange;3.9 Failure to Comply with the Exchange Act. The Borrower shall fail to comply with thereporting requirements of the Exchange Act; and/or the Borrower shall cease to be subject to thereporting requirements of the Exchange Act; or3.10 Liquidation. Any dissolution, liquidation, or winding up of Borrower or anysubstantial portion of its business.3.11 Cessation of Operations. Any cessation of operations by Borrower or Borrower admits itis otherwise generally unable to pay its debts as such debts become due,
 

 
provided, however, that any disclosure of the Borrower’s ability to continue as a “going concern”shall not be an admission that the Borrower cannot pay its debts as they become due.3.12 Maintenance of Assets. The failure by Borrower to maintain any material intellectualproperty rights, personal, real property or other assets which are necessary to conduct itsbusiness (whether now or in the future).3.13 Financial Statement Restatement. The restatement of any financial statements filed bythe Borrower with the SEC for any date or period from two years prior to the Issue Date of thisNote and until this Note is no longer outstanding, if the result of such restatement would, bycomparison to the unrestated financial statement, have constituted a material adverse effect on therights of the Holder with respect to this Note or the Purchase Agreement.3.14 Reverse Splits. The Borrower effectuates a reverse split of its Common Stock withouttwenty (20) days prior written notice to the Holder.Upon the occurrence and during the continuation of any Event of Default specified in Section 3.1(solely with respect to failure to pay the principal hereof or interest thereon when due at theMaturity Date), the Borrower shall pay to the Holder, in full satisfaction of its obligationshereunder, an amount equal to the Default Sum (as defined herein). Upon the occurrence and duringthe continuation of any Event of Default specified in Sections 3.1 (solely with respect to failureto pay the principal hereof or interest thereon when due on this Note upon a Trading MarketPrepayment Event pursuant to Section 1.7 or upon acceleration), 3.2, 3.3, 3.4, 3.6, or 3.8exercisable through the delivery of written notice to the Borrower by such Holders (the “DefaultNotice”), and upon the occurrence of an Event of Default specified the remaining sections ofArticles III (other than failure to pay the principal hereof or interest thereon at the MaturityDate specified in Section 3,1 hereof), the Note shall become immediately due and payable and theBorrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amountequal to the greater of (i) 150% times the sum of (w) the then outstandingprincipal amount of this Note plus (x) accrued and unpaid interest on the unpaid principalamount of this Note to the date of payment (the “Mandatory Prepayment Date”) plus (y)Default Interest, if any, on the amounts referred to in clauses (w) and/or (x) plus (z) anyamounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof (the then outstandingprincipal amount of this Note to the date of payment plus the amounts referred to inclauses (x), (y) and (z) shall collectively be known as the “Default Sum”) or (ii) the “parityvalue” of the Default Sum to be prepaid, where parity value means (a) the highest number of sharesof Common Stock issuable upon conversion of or otherwise pursuant to such Default Sum in accordancewith Article I, treating the Trading Day immediately preceding the Mandatory Prepayment Date as the“Conversion Date” for purposes of determining the lowest applicable Conversion Price, unless theDefault Event arises as a result of a breach in respect of a specific Conversion Date in which casesuch Conversion Date shall be the Conversion Date), multiplied by (b) the highest ClosingPrice for the Common Stock during the period beginning on the date of first occurrence of the Eventof Default and ending one day prior to the Mandatory Prepayment Date (the “Default Amount”) and allother amounts payable hereunder shall immediately become due and payable, all without demand,presentment or notice, all of which hereby are expressly waived, together with all costs,including, without
 

 
limitation, legal fees and expenses, of collection, and the Holder shall be entitled to exerciseall other rights and remedies available at law or in equity.If the Borrower fails to pay the Default Amount within five (5) business days of written noticethat such amount is due and payable, then the Holder shall have the right at any time, so long asthe Borrower remains in default (and so long and to the extent that there are sufficient authorizedshares), to require the Borrower, upon written notice, to immediately issue, in lieu of the DefaultAmount, the number of shares of Common Stock of the Borrower equal to the Default Amount divided bythe Conversion Price then in effect.ARTICLE IV. MISCELLANEOUS4.1 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder in theexercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shallany single or partial exercise of any such power, right or privilege preclude other or furtherexercise thereof or of any other right, power or privileges. All rights and remedies existinghereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.4.2 Notices. All notices, demands, requests, consents, approvals, and other communicationsrequired or permitted hereunder shall be in writing and, unless otherwise specified herein, shallbe (i) personally served, (ii) deposited in the mail, registered or certified, return receiptrequested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid,or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or tosuch other address as such party shall have specified most recently by written notice. Any noticeor other communication required or permitted to be given hereunder shall be deemed effective (a)upon hand delivery or delivery by facsimile, with accurate confirmation generated by thetransmitting facsimile machine, at the address or number designated below (if delivered on abusiness day during normal business hours where such notice is to be received), or the firstbusiness day following such delivery (if delivered other than on a business day during normalbusiness hours where such notice is to be received) or (b) on the second business day following thedate of mailing by express courier service, fully prepaid, addressed to such address, or uponactual receipt of such mailing, whichever shall first occur. The addresses for such communicationsshall be:If to the Borrower, to:CytoCore, Inc.414 North Orleans Street, Suite 510