Document:

ex102.htm

    Exhibit
10.2

     

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

     

    VALLEY
FORGE COMPOSITE TECHNOLOGIES, INC.

     

    Senior
Secured Convertible Note

     

    
      	
              Issuance
      Date:  September 29, 2008

            	
              Original
      Principal Amount: U.S.
$_____________

            

    

    

    FOR VALUE RECEIVED, Valley
Forge Composite Technologies, Inc., a Florida corporation (the “Company”), hereby promises to
pay to the order of [______________________], or registered assigns (“Holder”) the amount set out
above as the Original Principal Amount (as reduced pursuant to the terms hereof
pursuant to redemption, conversion or otherwise, the “Principal”) when due, whether
upon the Maturity Date (as defined below), acceleration, redemption or otherwise
(in each case in accordance with the terms hereof) and to pay interest (“Interest”) on any outstanding
Principal at the applicable Interest Rate from the date set out above as the
Issuance Date (the “Issuance Date”) until the same becomes
due and payable, whether upon an Interest Date (as defined below) or the
Maturity Date or acceleration, conversion, redemption or otherwise (in each case
in accordance with the terms hereof). This Senior Secured Convertible Note
(including all Senior Secured Convertible Notes issued in exchange, transfer or
replacement hereof, this “Note”) is one of an issue of
Senior Secured Convertible Notes issued pursuant to the Securities Purchase
Agreement on the Closing Date (collectively, the “Notes” and such other Senior
Secured Convertible Notes, the “Other Notes”). Certain capitalized
terms used herein are defined in Section 27.

     

    1. PAYMENTS OF
PRINCIPAL. On the Maturity Date, the Company shall pay to the Holder the
outstanding Principal amount, together with any accrued and unpaid Interest or
accrued and unpaid Late Charges on Principal and Interest.  Other than
as specifically permitted by this Note, the Company may not prepay any portion
of the outstanding Principal, accrued and unpaid Interest or accrued and unpaid
Late Charges on Principal and Interest, if any.

     

    2. INTEREST; INTEREST
RATE.

     

    (a) Interest
on this Note shall commence accruing on the Issuance Date, shall accrue daily at
the Interest Rate on the outstanding Principal amount from time to time, shall
be computed on the basis of a 360-day year comprised of twelve (12) thirty (30)
day months and shall be payable in arrears for each Quarter on the first
Business Day immediately following the end of such 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 1, 2008. Interest shall be payable on each Interest
Date to the record holder of this Note on the applicable Interest Date, and to
the extent that any Principal amount of this Note is converted prior to such
Interest Date, accrued and unpaid Interest with respect to such converted
Principal amount and accrued and unpaid Late Charges with respect to such
Principal and Interest shall be paid on the applicable Conversion Date (as
defined below) to the record holder of this Note, in cash or in shares of Common
Stock at the Interest Conversion Rate (as defined below), or a combination
thereof; provided, however, payment in
shares of Common Stock may only occur if during the fifteen (15) Business Days
immediately prior to the applicable Interest Date and through and including the
date such shares of Common Stock are issued to the Holder, all of the Equity
Conditions have been met and the Company shall have given the Holder notice in
accordance with the notice requirements set forth below.  From and
after the occurrence and during the continuance of any Event of Default, the
Interest Rate shall be increased to sixteen percent (16%). 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 such cure of such Event of Default.

    
      
         

      

      
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    (b) Subject
to the terms and conditions herein, the decision whether to pay interest
hereunder in cash or shares of Common Stock shall be at the discretion of the
Company.  Not less than fifteen (15) Business Days prior to each
Interest Date, the Company shall provide the Holder with written notice of its
election to pay interest hereunder either in cash or shares of Common Stock (the
Company may indicate in such notice that the election contained in such notice
shall continue for later periods until revised).  Within fifteen (15)
Business Days prior to an Interest Date, the Company’s election (whether
specific to an Interest Date or continuous) shall be irrevocable as to such
Interest Date.  Subject to the aforementioned conditions, failure to
timely provide such written notice shall be deemed an election by the Company to
pay the interest on such Interest Date in cash.  Payment of interest
in shares of Common Stock shall otherwise occur pursuant to Section 3(c) and
only for purposes of the payment of interest in shares, the Interest Date shall
be deemed the Conversion Date.  Interest shall cease to accrue with
respect to any principal amount converted, provided that the Company in fact
delivers the shares of Common Stock within the time period required by Section
3(c)(ii).  Except as otherwise provided herein, if at any time the
Company pays interest partially in cash and partially in shares of Common Stock,
then such payment shall be distributed ratably among the Holders based upon the
principal amount of the Notes held by each Holder.  Notwithstanding
anything to the contrary contained herein, if on any Interest Date the Company
has elected to pay interest in Common Stock and is not able to pay accrued
interest in the form of Common Stock because it does not then satisfy the
conditions for payment in the form of Common Stock set forth above, then, at the
option of the Holder, the Company, in lieu of delivering either shares of Common
Stock pursuant to this Section 2 or paying the regularly scheduled cash interest
payment, shall deliver, within three (3) Business Days of each applicable
Interest Date, an amount in cash equal to the product of the number of shares of
Common Stock otherwise deliverable to the Holder in connection with the payment
of interest due on such Interest Date and the highest VWAP during the period
commencing on the Interest Date and ending on the Business Day prior to the date
such payment is made.

     

    3. CONVERSION OF NOTES.
This Note shall be convertible into shares of Common Stock (as defined below),
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 shares of Common Stock in accordance with Section 3(c), at the
Conversion Rate (as defined below).  The Company shall not issue any
fraction of a share of Common Stock upon any conversion.  If the
issuance would result in the issuance of a fraction of a share of Common Stock,
the Company shall round such fraction of a share of Common Stock up to the
nearest whole share.  The Company shall pay any and all transfer,
stamp and similar taxes that may be payable with respect to the issuance and
delivery of Common Stock upon conversion of any Conversion Amount.

     

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

     

    (i) “Conversion Amount” means the
portion of the Principal to be converted, redeemed or otherwise with respect to
which this determination is being made.

     

    (ii) “Conversion Price” means, as of
any Conversion Date or other date of determination, $.35, subject to adjustment
as provided herein.

     

    (c) Mechanics of
Conversion.

     

    (i) Optional Conversion.
To convert any Conversion Amount into shares of Common Stock on any date (a
“Conversion Date”), the
Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt on or
prior to 11:59 p.m., New York time, on such date, a copy of an executed notice
of conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the
Company and (B) if required by Section 3(c)(iii), surrender this Note to a
nationally recognized overnight delivery service for delivery to the Company (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 an acknowledgment of confirmation of receipt of such
Conversion Notice to the Holder and the Company’s transfer agent (the “Transfer Agent”). On or before
the third (3rd)
Trading Day following the date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall (1)
provided that the Transfer Agent is participating in The Depository Trust
Company’s (“DTC”) Fast
Automated Securities Transfer Program, credit such aggregate number of shares of
Common Stock to which the Holder shall be entitled to the Holder’s or its
designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system or (Y) if the Transfer Agent is not participating in the DTC
Fast Automated Securities Transfer Program, issue and deliver (via reputable
overnight courier) to the address as specified in the Conversion Notice, a
certificate, registered in the name of the Holder or its designee, for the
number of shares of Common Stock to which the Holder shall be entitled; and (2)
pay to the Holder in cash an amount equal to the accrued and unpaid Interest on
the Conversion Amount up to and including the Conversion Date, including accrued
and unpaid Late Charges with respect to such Conversion Amount and Interest. If
this Note is physically surrendered for conversion as required by Section
3(c)(iii) and the outstanding Principal of this Note is greater than the
Principal portion of the Conversion Amount being converted, then the Company
shall as soon as practicable and in no event later than three (3) Business Days
after receipt of this Note and at its own expense, issue and deliver to the
Holder (or its designee) a new Note (in accordance with Section 17(d))
representing the outstanding Principal not converted. The Person or Persons
entitled to receive the shares of Common Stock issuable upon a conversion of
this Note shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on the Conversion Date. In the event of a partial
conversion of this Note pursuant hereto, the Principal amount converted shall be
deducted as set forth in the Conversion Notice.

    
      
         

      

      
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    (ii) Company’s Failure to Timely
Convert. If the Company shall fail, for any reason or for no reason, to
issue to the Holder within three (3) Trading Days after the Company’s receipt of
a facsimile copy of a Conversion Notice, a certificate for the number of shares
of Common Stock to which the Holder is entitled and register such shares of
Common Stock on the Company’s share register or to credit the Holder’s or its
designee’s balance account with DTC for such number of shares of Common Stock to
which the Holder is entitled upon the Holder’s conversion of any Conversion
Amount (as the case may be) (a “Conversion Failure”), then, in
addition to all other remedies available to the Holder, (1) the Company shall
pay in cash to the Holder on each day after such third (3rd)
Trading Day that the issuance of such shares of Common Stock is not timely
effected an amount equal to 2% of the product of (A) the sum of the number of
shares of Common Stock not issued to the Holder on a timely basis and to which
the Holder is entitled and (B) the Closing Sale Price of the Common Stock on the
Trading Day immediately preceding the last possible date which the Company could
have issued such shares of Common Stock to the Holder without violating Section
3(c)(i) and (2) the Holder, upon written notice to the Company, may void its
Conversion Notice with respect to, and retain or have returned (as the case may
be) any portion of this Note that has not been converted pursuant to such
Conversion Notice; provided that the
voiding of a Conversion Notice shall not affect the Company’s obligations to
make any payments which have accrued prior to the date of such notice pursuant
to this Section 3(c)(ii) or otherwise. In addition to the foregoing, if within
three (3) Trading Days after the Company’s receipt of the facsimile copy of a
Conversion Notice, the Company shall fail to issue and deliver a certificate to
the Holder and register such shares of Common Stock on the Company’s share
register or credit the Holder’s or its designee’s balance account with DTC for
the number of shares of Common Stock to which the Holder is entitled upon the
Holder’s conversion hereunder (as the case may be), and if on or after such
third (3rd)
Trading Day the Holder purchases (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by the Holder of
shares of Common Stock issuable upon such conversion that the Holder anticipated
receiving from the Company (a “Buy-In”), then the Company
shall, within three (3) Business Days after the Holder’s request and in the
Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the
Holder’s total purchase price (including brokerage commissions and other
out-of-pocket expenses, if any) for the shares of Common Stock so purchased (the
“Buy-In Price”), at
which point the Company’s obligation to deliver such certificate (and to issue
such shares of Common Stock) shall terminate, or (ii) promptly honor its
obligation to deliver to the Holder a certificate or certificates representing
such shares of Common Stock or credit the Holder’s balance account with DTC for
the number of shares of Common Stock to which the Holder is entitled upon the
Holder’s conversion hereunder (as the case may be) and pay cash to the Holder in
an amount equal to the excess (if any) of the Buy-In Price over the product of
(A) such number of shares of Common Stock times (B) the Closing Sale Price of
the Common Stock on the Trading Day immediately preceding 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, Interest and Late Charges converted and/or paid
(as the case may be) and the dates of such conversions and/or payments (as the
case may be) or shall use such other method, reasonably satisfactory to the
Holder and the Company, so as not to require physical surrender of this Note
upon conversion.

     

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

    
      
         

      

      
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    (d) Limitations on
Conversions.

     

    (i) Beneficial Ownership.
Notwithstanding anything to the contrary contained in this Note, this Note shall
not be convertible by the Holder hereof, and the Company shall not effect any
conversion of this Note or otherwise issue any shares of Common Stock to the
extent (but only to the extent) that, if after giving effect to such conversion,
the Holder or any of its affiliates would beneficially own in excess of 9.99%
(the “Maximum
Percentage”) of the outstanding shares of Common Stock
immediately after giving effect to such conversion. To the extent the above
limitation applies, the determination of whether this Note shall be convertible
(vis-à-vis other convertible, exercisable or exchangeable securities owned by
the Holder) shall, subject to such Maximum Percentage limitation, be determined
on the basis of the first submission to the Company for conversion, exercise or
exchange (as the case may be). No prior inability to convert this Note, or to
issue shares of Common Stock, pursuant to this paragraph shall have any effect
on the applicability of the provisions of this paragraph with respect to
any subsequent determination of convertibility. For purposes of this paragraph,
beneficial ownership and all determinations and calculations (including, without
limitation, with respect to calculations of percentage ownership) shall be
determined by the Holder in accordance with Section 13(d) of the 1934 Act (as
defined in the Securities Purchase Agreement) and the rules and regulations
promulgated thereunder. The provisions of this paragraph shall be implemented in
a manner otherwise than in strict conformity with the terms of this paragraph to
correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Maximum Percentage beneficial ownership
limitation herein contained or to make changes or supplements necessary or
desirable to properly give effect to such Maximum Percentage limitation. The
limitations contained in this paragraph shall apply to a successor Holder of
this Note. For any reason at any time, upon the written or oral request of the
Holder, the Company shall within one (1) Business Day confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding,
including by virtue of any prior conversion or exercise of convertible or
exercisable securities into Common Stock, including, without limitation,
pursuant to this Note or securities issued pursuant to the Securities Purchase
Agreement.  Each delivery of a Conversion Notice by the Holder will
constitute a representation by the Holder that it has evaluated the limitation
set forth in this paragraph and determined that issuance of the full number of
Conversion Shares requested by the Holder in such Conversion Notice is permitted
under this paragraph.

     

    4. RIGHTS UPON EVENT OF
DEFAULT.

     

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

     

    (i) the
suspension  from trading or failure  of the Common Stock to
be listed on an Eligible Market for a period of five (5) consecutive days or for
more than an aggregate of ten (10) days in any 365-day period;

     

    (ii) the
Company’s (A) failure to cure a Conversion Failure by delivery of the required
number of shares of Common Stock within five (5) Trading Days after the
applicable Conversion Date or (B) notice, written or oral, to any holder of the
Notes, including, without limitation, by way of public announcement or through
any of its agents, at any time, of its intention not to comply with a request
for conversion of any Notes into shares of Common Stock that is requested in
accordance with the provisions of the Notes, other than pursuant to Section
3(d);

     

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

     

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

    
      
         

      

      
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    (v) the
Company fails to remove any restrictive legend on any certificate or any shares
of Common Stock issued to the Holder upon conversion or exercise (as the case
may be) of any Securities acquired by the Holder under the Securities Purchase
Agreement (including this Note) as and when required by such Securities or the
Securities Purchase Agreement, unless otherwise then prohibited by applicable
federal securities laws, and any such remains uncured for at least five (5)
Trading Days;

     

    (vi) the
occurrence of any default under, redemption of or acceleration prior to maturity
of any Indebtedness (as defined in the Securities Purchase Agreement) of the
Company or any of its Subsidiaries, other than with respect to (A) Permitted
Senior Indebtedness and (B) any Other Notes;

     

    (vii) bankruptcy,
insolvency, reorganization or liquidation proceedings or other proceedings for
the relief of debtors shall be instituted by or against the Company or any
Subsidiary and, if instituted against the Company or any Subsidiary by a third
party, shall not be dismissed within thirty (30) days of their
initiation;

     

    (viii) the
commencement by the Company or any Subsidiary of a voluntary case or proceeding
under any applicable federal, state or foreign bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent, or the consent by it to the entry of a
decree, order, judgment or other similar document in respect of the Company or
any Subsidiary in an involuntary case or proceeding under any applicable
federal, state or foreign bankruptcy, insolvency, reorganization or other
similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable federal, state or foreign
law, or the consent by it to the filing of such petition or to the appointment
of or taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the execution of a composition of debts, or the
occurrence of any other similar federal, state or foreign proceeding, or the
admission by it in writing of its inability to pay its debts generally as they
become due, the taking of corporate action by the Company or any Subsidiary in
furtherance of any such action or the taking of any action by any Person to
commence a UCC foreclosure sale or any other similar action under federal, state
or foreign law;

     

    (ix) the entry
by a court of (i) a decree, order, judgment or other similar document in respect
of the Company or any Subsidiary of a voluntary or involuntary case or
proceeding under any applicable federal, state or foreign bankruptcy,
insolvency, reorganization or other similar law or (ii) a decree, order,
judgment or other similar document adjudging the Company or any Subsidiary as
bankrupt or insolvent, or approving as properly filed a petition seeking
liquidation, reorganization, arrangement, adjustment or composition of or in
respect of the Company or any Subsidiary under any applicable federal, state or
foreign law or (iii) a decree, order, judgment or other similar document
appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or
other similar official of the Company or any Subsidiary or of any substantial
part of its property, or ordering the winding up or liquidation of its affairs,
and the continuance of any such decree, order, judgment or other similar
document or any such other decree, order, judgment or other similar document
unstayed and in effect for a period of thirty (30) consecutive
days;

     

    (x) a final
judgment or judgments for the payment of money aggregating in excess of $250,000
are rendered against the Company and/or any of its Subsidiaries and which
judgments are not, within thirty (30) days after the entry thereof, bonded,
discharged or stayed pending appeal, or are not discharged within thirty (30)
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 $250,000 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 or such Subsidiary (as the case may be) will receive
the proceeds of such insurance or indemnity within thirty (30) days of the
issuance of such judgment;

     

    (xi) the
Company and/or any Subsidiary, individually or in the aggregate, either (i)
fails to pay, when due, or within any applicable grace period, any payment with
respect to any Indebtedness in excess of $250,000 due to any third party, other
than, with respect to unsecured Indebtedness only, payments contested by the
Company and/or such Subsidiary (as the case may be) in good faith by proper
proceedings and with respect to which adequate reserves have been set aside for
the payment thereof in accordance with GAAP, or otherwise be in breach or
violation of any agreement for monies owed or owing in an amount in excess of
$250,000, which breach or violation permits the other party thereto to declare a
default or otherwise accelerate amounts due thereunder, or (ii) suffer to exist
any other circumstance or event that would, with or without the passage of time
or the giving of notice, result in a default or event of default under any
agreement binding the Company or any Subsidiary, which default or event of
default would or is likely to have a material adverse effect on the business,
assets, operations (including results thereof), liabilities, properties,
condition (including financial condition) or prospects of the Company or any of
its Subsidiaries, individually or in the aggregate;

    
      
         

      

      
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    (xii) the
Company or any Subsidiary materially breaches any representation, warranty,
covenant or other term or condition of any Transaction Document, except, in the
case of a breach of a covenant of any Transaction Document which is curable,
only if such breach remains uncured for a period of at least five (5) Trading
Days;

     

    (xiii) any
material breach or failure in any respect by the Company or any Subsidiary to
comply with any provision of Section 12 of this Note; or 

     

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

     

    (b) Redemption Right.
Upon the occurrence of an Event of Default with respect to this Note or any
Other Note, the Company shall within one (1) Business Day deliver written notice
thereof via facsimile and overnight courier (with next day delivery specified)
(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 (A) the sum of the Conversion Amount to be redeemed together with
accrued and unpaid Interest with respect to such Conversion Amount and accrued
and unpaid Late Charges with respect to such Conversion Amount and Interest and
(B) the Redemption Premium and (ii) the product of (X) the Conversion Rate with
respect to such sum of the Conversion Amount together with accrued and unpaid
Interest with respect to such Conversion Amount and accrued and unpaid Late
Charges with respect to such Conversion Amount and Interest in effect at such
time as the Holder delivers an Event of Default Redemption Notice and (Y) the
product of (1) the Equity Value Redemption Premium and (2) the greater of (I)
the Closing Sale Price of the Common Stock on the date immediately preceding
such Event of Default, (II) the Closing Sale Price of the Common Stock on the
date immediately after such Event of Default and (III) the Closing Sale Price of
the Common Stock on the date the Holder delivers the Event of Default Redemption
Notice (the “Event of
Default Redemption
Price”). Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 10. To the extent redemptions required
by this Section 4(b) are deemed or determined by a court of competent
jurisdiction to be prepayments of the Note by the Company, such redemptions
shall be deemed to be voluntary prepayments. Notwithstanding anything to the
contrary in this Section 4, but subject to Section 3(d), until the Event of
Default Redemption Price (together with any interest thereon) is paid in full,
the Conversion Amount submitted for redemption under this Section 4(b) (together
with any interest thereon) may be converted, in whole or in part, by the Holder
into Common Stock pursuant to Section 3. In the event of a partial redemption of
this Note pursuant hereto, the Principal amount redeemed shall be deducted as
set forth in the Event of Default Redemption Notice. The parties hereto agree
that in the event of the Company’s redemption of any portion of the Note under
this Section 4(b), the Holder’s damages would be uncertain and difficult to
estimate because of the parties’ inability to predict future interest rates and
the uncertainty of the availability of a suitable substitute investment
opportunity for the Holder. Accordingly, any redemption premium due under this
Section 4(b) is intended by the parties to be, and shall be deemed, a reasonable
estimate of the Holder’s actual loss of its investment opportunity and not as a
penalty.

     

    5. RIGHTS UPON FUNDAMENTAL
TRANSACTION.

     

    (a) Assumption. The
Company shall not enter into or be party to a Fundamental Transaction unless
(i) the Successor Entity assumes in writing all of the obligations of the
Company under this Note and the other Transaction Documents in accordance with
the provisions of this Section 5(a) pursuant to written agreements in form and
substance satisfactory to the Holder and approved by the Holder 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 then outstanding and the interest rates of the Notes
held by such holder, having similar conversion rights as the Notes and having
similar ranking to the Notes, and satisfactory to the Holder and (ii) the
Successor Entity (including its Parent Entity) is a publicly traded corporation
whose common stock is quoted on or listed for trading on an Eligible Market.
Upon the occurrence of any Fundamental Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Note and the other Transaction
Documents 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 and the other Transaction
Documents with the same effect as if such Successor Entity had been named as the
Company herein. Upon consummation of the Fundamental Transaction, the Successor
Entity shall deliver to the Holder confirmation that there shall be issued upon
conversion or redemption of this Note at any time after the consummation of the
Fundamental Transaction, in lieu of the shares of the Company’s Common Stock (or
other securities, cash, assets or other property (except such items still
issuable under Section 6, which shall continue to be receivable thereafter)
issuable upon the conversion or redemption of the Notes prior to such
Fundamental Transaction, such shares of the publicly traded common stock (or
their equivalent) of the Successor Entity (including its Parent Entity) 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 (without regard to any limitations on the conversion of
this Note), as adjusted in accordance with the provisions of this Note. The
provisions of this Section shall apply similarly and equally to successive
Fundamental Transactions and shall be applied without regard to any limitations
on the conversion of this Note.

    
      
         

      

      
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    (b) Redemption Right. No
sooner than twenty (20) Trading Days nor later than ten (10) Trading Days prior
to the consummation of a Fundamental Transaction, but not prior to the public
announcement of such Fundamental Transaction, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a “Fundamental Transaction Notice”). At any time during
the period beginning after the Holder’s receipt of a Fundamental Transaction
Notice and ending on the later of twenty (20) Trading Days after (A)
consummation of such Fundamental Transaction or (B) the date of receipt of such
Fundamental Transaction Notice, the Holder may require the Company to redeem all
or any portion of this Note by delivering written notice thereof (“Fundamental Transaction Redemption
Notice”) to the Company, which Fundamental Transaction 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 in cash at a price equal to the
greater of (i) the sum of (x) the product of the Fundamental Transaction
Redemption Premium and the Conversion Amount being redeemed and (y) the amount
of any accrued but unpaid Interest on such Conversion Amount being redeemed and
accrued and unpaid Late Charges, if any, with respect to such Conversion Amount
and Interest through the date of such redemption payment and (ii) the product of
(x) the Equity Value Redemption Premium and (y) the sum of (1) the product of
(A) the Conversion Amount being redeemed multiplied by (B) the quotient
determined by dividing (I) the aggregate cash consideration and the aggregate
cash value of any non-cash consideration per share of Common Stock to be paid to
the holders of the shares of Common Stock upon consummation of the Fundamental
Transaction (any such non-cash consideration to be valued at the higher of the
Closing Sale Price of such securities as of the Trading Day immediately prior to
the consummation of such Fundamental Transaction, the Closing Sale Price on the
Trading Day immediately following the public announcement of such proposed
Fundamental Transaction and the Closing Sale Price on the Trading Day
immediately prior to the public announcement of such proposed Fundamental
Transaction) by (II) the Conversion Price plus (2) the amount of any accrued but
unpaid Interest on such Conversion Amount being redeemed and accrued and unpaid
Late Charges, if any, with respect to such Conversion Amount and Interest
through the date of such redemption payment, (the “Fundamental Transaction Redemption
Price”).  Redemptions required by this Section 5 shall be made
in accordance with the provisions of Section 10 and shall have priority to
payments to stockholders in connection with a Fundamental Transaction. To the
extent redemptions required by this Section 5(b) are deemed or determined by a
court of competent jurisdiction to be prepayments of the Note by the Company,
such redemptions shall be deemed to be voluntary prepayments. Notwithstanding
anything to the contrary in this Section 5, but subject to Section 3(d), until
the Fundamental Transaction Redemption Price (together with any interest
thereon) is paid in full, the Conversion Amount submitted for redemption under
this Section 5(b) (together with any interest thereon) may be converted, in
whole or in part, by the Holder into Common Stock pursuant to Section 3. In the
event of a partial redemption of this Note pursuant hereto, the Principal amount
redeemed shall be deducted as set forth in the Fundamental Transaction
Redemption Notice. The parties hereto agree that in the event of the Company’s
redemption of any portion of the Note under this Section 5(b), the Holder’s
damages would be uncertain and difficult to estimate because of the parties’
inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the Holder.
Accordingly, any redemption premium due under this Section 5(b) is intended by
the parties to be, and shall be deemed, a reasonable estimate of the Holder’s
actual loss of its investment opportunity and not as a penalty.

     

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

     

    (a) Purchase Rights. In
addition to any adjustments pursuant to Section 7 below, if at any time the
Company grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of Common Stock (the “Purchase Rights”), then the
Holder will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which the Holder could have acquired if
the Holder had held the number of shares of Common Stock acquirable upon
complete conversion of this Note (without taking into account any limitations or
restrictions on the convertibility of this Note) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights (provided, however, that to the
extent that the Holder’s right to participate in any such Purchase Right would
result in the Holder exceeding the Maximum Percentage, then the Holder shall not
be entitled to participate in such Purchase Right to such extent (or beneficial
ownership of such shares of Common Stock as a result of such Purchase Right to
such extent) and such Purchase Right to such extent shall be held in abeyance
for the Holder until such time, if ever, as its right thereto would not result
in the Holder exceeding the Maximum Percentage).

    
      
         

      

      
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    (b) Other Corporate
Events. In addition to and not in substitution for any other rights
hereunder, prior to the consummation of any Fundamental Transaction pursuant to
which holders of shares of Common Stock are entitled to receive securities or
other assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company
shall make appropriate provision to insure that the Holder will thereafter have
the right to receive upon a conversion of this Note (i) in addition to the
shares of Common Stock receivable upon such conversion, such securities or other
assets to which the Holder would have been entitled with respect to such shares
of Common Stock had such shares of Common Stock been held by the Holder upon the
consummation of such Corporate Event (without taking into account any
limitations or restrictions on the convertibility of this Note) or (ii) in lieu
of the shares of Common Stock otherwise receivable upon such conversion, such
securities or other assets received by the holders of shares of Common Stock in
connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Note initially been issued
with conversion rights for the form of such consideration (as opposed to shares
of Common Stock) at a conversion rate for such consideration commensurate with
the Conversion Rate. 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 Stock.  If and whenever from and
after the Subscription Date and to and through the date that is two (2) years
after the Subscription Date, the Company issues or sells, or in accordance with
this Section 7(a) is deemed to have issued or sold, any shares of Common Stock
(including the issuance or sale of shares of Common Stock owned or held by or
for the account of the Company, but excluding any Excluded Securities (as
defined in the Securities Purchase Agreement) issued or sold or deemed to have
been issued or sold) for a consideration per share (the “New Issuance Price”) less than
a price equal to the Conversion Price in effect immediately prior to such issue
or sale or deemed issuance or sale (such lesser price being referred to as the
“Applicable Price”) (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 share of Common Stock is
issuable upon the exercise of any such Option or upon conversion, exercise or
exchange of any Convertible Securities issuable upon exercise of any such Option
is less than the Applicable Price, then such share of Common Stock shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the granting or sale of such Option for such price per share. For
purposes of this Section 7(a)(i), the “lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Options or upon
conversion, exercise or exchange of any Convertible Securities issuable upon
exercise of any such Option” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon the granting or sale of the Option, upon exercise
of the Option and upon conversion, exercise or exchange of any Convertible
Security issuable upon exercise of such Option. Except as contemplated below, no
further adjustment of the Conversion Price shall be made upon the actual
issuance of such share of Common Stock or of such Convertible Securities upon
the exercise of such Options or upon the actual issuance of such share of Common
Stock upon conversion, exercise or exchange 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 share of
Common Stock is issuable upon the conversion, exercise or exchange thereof is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the issuance or sale of such Convertible Securities for such price per
share.  For the purposes of this Section 7(a)(ii), the “lowest price
per share for which one share of Common Stock is issuable upon the conversion,
exercise or exchange thereof” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to one
share of Common Stock upon the issuance or sale of the Convertible Security and
upon conversion, exercise or exchange of such Convertible Security. Except as
contemplated below, no further adjustment of the Conversion Price shall be made
upon the actual issuance of such share of Common Stock upon conversion, exercise
or exchange 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 has been or is to be made pursuant to other
provisions of this Section 7(a), except as contemplated below, no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.

    
      
         

      

      
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    (iii) Change in Option Price or
Rate of Conversion. If the purchase or exercise price provided for in any
Options, the additional consideration, if any, payable upon the issue,
conversion, exercise or exchange of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exercisable or
exchangeable for shares of Common Stock increases or decreases at any time, the
Conversion Price in effect at the time of such increase or decrease 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 increased or
decreased purchase price, additional consideration or increased or decreased
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
increased or decreased in the manner described in the immediately preceding
sentence, then such Option or Convertible Security and the shares of Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such increase or decrease. No
adjustment pursuant to this Section 7(a) 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 the
difference of (i) the aggregate fair market value of such Options and other
securities issued or sold in such integrated transaction, less (ii) the fair
market value of the securities other than such Option, issued or sold in such
transaction and the other securities issued or sold in such integrated
transaction will be deemed to have been issued or sold for the balance of the
consideration received by the Company.  If any shares of Common Stock,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to
be the net amount received by the Company therefor. If any shares of Common
Stock, Options or Convertible Securities are issued or sold for a consideration
other than cash, the amount of such consideration received by the Company will
be the fair value of such consideration, except where such consideration
consists of publicly traded securities, in which case the amount of
consideration received by the Company for such securities will be the average
VWAP of such security for the five (5) Trading Day period immediately preceding
the date of receipt. If any shares of Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such shares of Common Stock, Options or Convertible Securities (as the case may
be). The fair value of any consideration other than cash or publicly traded
securities will be determined jointly by the Company and the Holder. 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 such Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the Holder. The determination of such appraiser
shall be final and 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 shares of Common Stock for the purpose
of entitling them (A) to receive a dividend or other distribution payable in
Common Stock, Options or in Convertible Securities or (B) to subscribe for or
purchase shares of Common Stock, Options or Convertible Securities, then such
record date will be deemed to be the date of the issue or sale of the shares of
Common Stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the granting of
such right of subscription or purchase (as the case may be).

     

    (b) Adjustment of Conversion
Price upon Subdivision or Combination of Common Stock.  If the
Company at any time on or after the Subscription Date subdivides (by any stock
split, stock dividend, recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision will be
proportionately reduced. If the Company at any time on or after the Subscription
Date combines (by combination, reverse stock split or otherwise) one or more
classes of its outstanding shares of Common Stock into a smaller number of
shares, the Conversion Price in effect immediately prior to such combination
will be proportionately increased. Any adjustment pursuant to this Section 7(b)
shall become effective immediately after the effective date of such subdivision
or combination. If any event requiring an adjustment under this Section 7(b)
occurs during the period that a Conversion Price is calculated hereunder, then
the calculation of such Conversion Price shall be adjusted appropriately to
reflect such event.

    
      
         

      

      
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    (c) Other Events. In the
event that the Company (or any direct or indirect subsidiary thereof) shall
take any action to which the provisions hereof are not strictly applicable, or,
if applicable, would not operate to protect the Holder from dilution or if any
event occurs of the type contemplated by the provisions of this Section 7 but
not expressly provided for by such provisions (including, without limitation,
the granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company’s Board of Directors shall in good faith
determine and implement an appropriate adjustment in the Conversion Price so as
to protect the rights of the Holder; provided that no such
adjustment pursuant to this Section 7(c) will increase the Conversion Price as
otherwise determined pursuant to this Section 7, provided further that
if the Holder does not accept such adjustments as appropriately protecting its
interests hereunder against such dilution, then the Company’s Board of Directors
and the Holder shall agree, in good faith, upon an independent investment bank
of nationally recognized standing to make such appropriate adjustments, whose
determination shall be final and binding and whose fees and expenses shall be
borne by the Company.

     

    8. NONCIRCUMVENTION. The
Company hereby covenants and agrees that the Company will not, by amendment of
its Certificate of Incorporation, Bylaws or through any reorganization, transfer
of assets, consolidation, merger, scheme of arrangement, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Note, and will at all
times in good faith carry out all of the provisions of this Note and take all
action as may be required to protect the rights of the Holder of this Note.
Without limiting the generality of the foregoing, the Company (i) shall not
increase the par value of any shares of Common Stock receivable upon conversion
of this Note above the Conversion Price then in effect, (ii) shall take all
such actions as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the conversion of this Note, and (iii) shall, so long as any of the Notes
are outstanding, take all action necessary to reserve and keep available out of
its authorized and unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the Notes, the maximum number of shares of Common
Stock as shall from time to time be necessary to effect the conversion of the
Notes then outstanding (without regard to any limitations on
conversion).

     

    9. RESERVATION OF AUTHORIZED
SHARES.

     

    (a) Reservation. The
Company shall initially reserve out of its authorized and unissued Common Stock
a number of shares of Common Stock for each of the Notes equal to 120% of the
entire Conversion Rate with respect to the entire Conversion Amount of each such
Note as of the Issuance Date.  So long
as any of the Notes are outstanding, the Company shall take all action necessary
to reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Notes, 120% of the
number of shares of Common Stock as shall from time to time be necessary to
effect the conversion of all of the Notes then outstanding; provided that at no
time shall the number of shares of Common Stock so reserved be less than the
number of shares required to be reserved by the previous sentence (without
regard to any limitations on conversions) (the “Required Reserve
Amount”).  The initial number of shares of Common Stock
reserved for conversions of the Notes and each increase in the number of shares
so reserved shall be allocated pro rata among the holders of the Notes based on
the original principal amount of the Notes held by each holder at the Closing
(as defined in the Securities Purchase Agreement) or increase in the number of
reserved shares (as the case may be) (the “Authorized Share Allocation”).
In the event that a holder shall sell or otherwise transfer any of such holder’s
Notes, each transferee shall be allocated a pro rata portion of such holder’s
Authorized Share Allocation. Any shares of Common Stock reserved and allocated
to any Person which ceases to hold any Notes shall be allocated to the remaining
holders of Notes, pro rata based on the principal amount of the Notes then held
by such holders.

     

    (b) Insufficient Authorized
Shares. If, notwithstanding Section 9(a), and not in limitation thereof,
at any time while any of the Notes remain outstanding the Company does not have
a sufficient number of authorized and unreserved shares of Common Stock to
satisfy its obligation to reserve for issuance upon conversion of the Notes at
least a number of shares of Common Stock equal to the Required Reserve Amount
(an “Authorized Share
Failure”), then the Company shall immediately take all action necessary
to increase the Company’s authorized shares of Common Stock to an amount
sufficient to allow the Company to reserve the Required Reserve Amount for the
Notes then outstanding. Without limiting the generality of the foregoing
sentence, as soon as practicable after the date of the occurrence of an
Authorized Share Failure, but in no event later than sixty (60) days after the
occurrence of such Authorized Share Failure, the Company shall hold a meeting of
its stockholders for the approval of an increase in the number of authorized
shares of Common Stock.  In connection with such meeting, the Company
shall provide each stockholder with a proxy statement and shall use its best
efforts to solicit its stockholders’ approval of such increase in authorized
shares of Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal.

    
      
         

      

      
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    10. HOLDER’S
REDEMPTIONS.

     

    (a) Mechanics. The
Company shall deliver the applicable Event of Default Redemption Price to the
Holder within five (5) Business Days after the Company’s receipt of the Holder’s
Event of Default Redemption Notice. If the Holder has submitted a Fundamental
Transaction Redemption Notice in accordance with Section 5(b), the Company shall
deliver the applicable Fundamental Transaction Redemption Price to the Holder
concurrently with the consummation of such Fundamental Transaction if such
notice is received prior to the consummation of such Fundamental Transaction and
within five (5) Business Days after the Company’s receipt of such notice
otherwise.  In the event of a redemption of less than all of the
Conversion Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 17(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the applicable Redemption Price to the Holder
within the time period required, at any time thereafter and until the Company
pays such unpaid Redemption Price in full, the Holder shall have the option, in
lieu of redemption, to require the Company to promptly return to the Holder all
or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (together
with any Late Charges thereon) has not been paid. Upon the Company’s receipt of
such notice, (x) the applicable Redemption Notice shall be null and void with
respect to such Conversion Amount, (y) the Company shall immediately return this
Note, or issue a new Note (in accordance with Section 17(d)) to the Holder
representing the sum of such Conversion Amount to be redeemed together with
accrued and unpaid Interest with respect to such Conversion Amount and accrued
and unpaid Late Charges with respect to such Conversion Amount and Interest and
(z) after Shareholder Approval is obtained, the Conversion Price of this Note or
such new Notes shall be adjusted to the lesser of (A) the Conversion Price as in
effect on the date on which the applicable Redemption Notice is voided and (B)
the lowest Closing Bid Price of the Common Stock during the period beginning on
and including the date on which the applicable Redemption Notice is delivered to
the Company and ending on and including the date on which the applicable
Redemption Notice is voided. The Holder’s delivery of a notice voiding a
Redemption Notice and exercise of its rights following such notice shall not
affect the Company’s obligations to make any payments of Late Charges which have
accrued prior to the date of such notice with respect to the Conversion Amount
subject to such notice.

     

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

     

    11. VOTING
RIGHTS.  The Holder shall have no voting rights as the holder
of this Note, except as required by law, including, without limitation, the
Business Corporation Act of the State of Florida, and as expressly provided in
this Note.

     

    12. COVENANTS.

     

    (a) Rank. All
payments due under this Note (a) shall rank pari passu with all Other
Notes and all Prior Notes (as defined in the Securities Purchase Agreement) and
(b) shall be senior to all other Indebtedness of the Company and its
Subsidiaries, other than the Permitted Senior Indebtedness.

     

    (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.

    
      
         

      

      
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    (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 Indebtedness (other than
Permitted Senior 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, (i) an event constituting an Event of Default has occurred and is
continuing or (ii) an event that with the passage of time and without being
cured would constitute an Event of Default has occurred and is
continuing.

     

    (e) Restriction on Redemption
and Cash Dividends. Until all of the Notes and Prior Notes (as defined in
the Securities Purchase Agreement) have been converted, redeemed or otherwise
satisfied in accordance with their terms, the Company shall not, directly or
indirectly, redeem, repurchase or declare or pay any cash dividend or
distribution on its capital stock without the prior express written consent of
the Holder.

     

    (f) Restriction on Transfer of
Assets. The Company shall not, and shall cause each Subsidiary to not,
sell, lease, convey or otherwise dispose of any assets or rights of the Company
or any Subsidiary owned or hereafter acquired whether in a single transaction or
a series of related transactions, other than (i) sales, leases, conveyances and
other dispositions of such assets or rights by the Company and its Subsidiaries
that, in the aggregate, do not have a fair market value in excess of $250,000 in
any twelve (12) month period and (ii) sales of inventory in the ordinary course
of business.

     

    (g) Maturity of
Indebtedness. The Company shall not permit any Indebtedness of the
Company or any of the Subsidiaries to mature or accelerate prior to the Maturity
Date, other than Permitted Senior Indebtedness.

     

    13. SECURITY.  This
Note and the Other Notes are secured to the extent and in the manner set forth
in the Transaction Documents (including, without limitation, the Security
Documents and the Guaranties (as defined in the Securities Purchase
Agreement).

     

    14. PARTICIPATION. The
Holder, as the holder of this Note, shall be entitled to receive such dividends
paid and distributions made to the holders of Common Stock to the same extent as
if the Holder had converted this Note into Common Stock (without regard to any
limitations on conversion herein or elsewhere) and had held such shares of
Common Stock on the record date for such dividends and distributions. Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock (provided, however, that to the
extent that the Holder’s right to participate in any such dividend or
distribution would result in the Holder exceeding the Maximum Percentage, then
the Holder shall not be entitled to participate in such dividend or distribution
to such extent (or the beneficial ownership of any such shares of Common Stock
as a result of such dividend or distribution to such extent) and such dividend
or distribution to such extent shall be held in abeyance for the benefit of the
Holder until such time, if ever, as its right thereto would not result in the
Holder exceeding the Maximum Percentage).

     

    15. AMENDING THE TERMS OF
NOTES. The prior written consent of the Holder shall be required for any
change or amendment to this Note. No consideration shall be offered or paid to
the Holder to amend or consent to a waiver or modification of any provision of
this Note unless the same consideration is also offered to all of the holders of
the Other Notes. The Holder shall be entitled, at its option, to the benefit of
any amendment to any of the Other Notes.

     

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

    
      
         

      

      
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    17. REISSUANCE OF THIS
NOTE.

     

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

     

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

     

    (c) Note Exchangeable for
Different Denominations. This Note is exchangeable, upon the surrender
hereof by the Holder at the principal office of the Company, for a new Note or
Notes (in accordance with Section 17(d) and in principal amounts of at least
$10,000) representing in the aggregate the outstanding Principal of this Note,
and each such new Note will represent such portion of such outstanding Principal
as is designated by the Holder at the time of such surrender.

     

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

     

    18. REMEDIES, CHARACTERIZATIONS,
OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided
in this Note shall be cumulative and in addition to all other remedies available
under this Note and any of the other Transaction Documents at law or in equity
(including a decree of specific performance and/or other injunctive relief), and
nothing herein shall limit the Holder’s right to pursue actual and consequential
damages for any failure by the Company to comply with the terms of this
Note.  The Company covenants to the Holder that there shall be no
characterization concerning this instrument other than as expressly provided
herein. 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.

    
      
         

      

      
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    19. PAYMENT OF COLLECTION,
ENFORCEMENT AND OTHER COSTS.  If (a) this Note is placed in the
hands of an attorney for collection or enforcement or is collected or enforced
through any legal proceeding or the Holder otherwise takes action to collect
amounts due under this Note or to enforce the provisions of this Note or (b)
there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors’ rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, without limitation,
attorneys’ fees and disbursements.

     

    20. CONSTRUCTION;
HEADINGS.  This Note shall be deemed to be jointly drafted by
the Company and the Holder 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. Terms used
in this Note but defined in the other Transaction Documents shall have the
meanings ascribed to such terms on the Closing Date in such other Transaction
Documents unless otherwise consented to in writing by the Holder.

     

    21. FAILURE OR INDULGENCE NOT
WAIVER. No failure or delay on the part of the Holder in the exercise of
any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege. No waiver shall be effective unless it is in writing and signed by an
authorized representative of the waiving party.

     

    22. DISPUTE RESOLUTION.
In the case of a dispute as to the determination of the Closing Bid Price, the
Closing Sale Price or the fair market value or the arithmetic calculation of the
Conversion Rate or any Redemption Price, the Company or the Holder (as the case
may be) shall submit the disputed determinations or arithmetic calculations (as
the case may be) via facsimile within two (2) Business Days of receipt, or
deemed receipt, of the applicable notice or other event giving rise to such
dispute (as the case may be) to the Company or the Holder (as the case may be).
If the Holder and the Company are unable to agree upon such determination or
calculation within two (2) Business Days of such disputed determination or
arithmetic calculation being submitted to the Company or the Holder (as the case
may be), then the Company shall, within two (2) Business Days submit via
facsimile (a) the disputed determination of the Closing Bid Price, the Closing
Sale Price or fair market value (as the case may be) 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 any Redemption
Price (as the case may be) to the Company’s independent, outside accountant. The
Company shall cause at its expense the investment bank or the accountant (as the
case may be) to perform the determinations or calculations (as the case may be)
and notify the Company and the Holder of the results no later than ten (10)
Business Days from the time it receives such disputed determinations or
calculations (as the case may be). Such investment bank’s or accountant’s
determination or calculation (as the case may be) shall be binding upon all
parties absent demonstrable error.

     

    23. NOTICES;
PAYMENTS.

     

    (a) Notices. Whenever
notice is required to be given under this Note, unless otherwise provided
herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt
written notice of all actions taken pursuant to this Note, including in
reasonable detail a description of such action and the reason therefore. Without
limiting the generality of the foregoing, the Company will give written notice
to the Holder (i) immediately upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least fifteen (15) days prior to the date on which the
Company closes its books or takes a record (A) with respect to any dividend or
distribution upon the Common Stock, (B) with respect to any grant, issuances, or
sales of any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property to holders of shares of Common Stock or
(C) for determining rights to vote with respect to any Fundamental Transaction,
dissolution or liquidation, provided in each case that such information shall be
made known to the public prior to or in conjunction with such notice being
provided to the Holder.

    
      
         

      

      
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    (b) Payments. Whenever
any payment of cash is to be made by the Company to any Person pursuant to this
Note, such payment shall be made in lawful money of the United States of America
by a check drawn on the account of the Company and sent via overnight courier
service to such Person at such address as previously provided to the Company in
writing (which address, in the case of each of the Buyers, shall initially be as
set forth on the Schedule of Buyers attached to the Securities Purchase
Agreement); provided that the Holder may elect to receive a payment of cash via
wire transfer of immediately available funds by providing the Company with prior
written notice setting out such request and the Holder’s wire transfer
instructions. Whenever any amount expressed to be due by the terms of this Note
is due on any day which is not a Business Day, the same shall instead be due on
the next succeeding day which is a Business Day and, in the case of any Interest
Date which is not the date on which this Note is paid in full, the extension of
the due date thereof shall not be taken into account for purposes of determining
the amount of Interest due on such date. Any amount of Principal or other
amounts due under the Transaction Documents which is not paid when due shall
result in a late charge being incurred and payable by the Company in an amount
equal to interest on such amount at the rate of sixteen percent (16%) per annum
from the date such amount was due until the same is paid in full (“Late Charge”).

     

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

     

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

     

    26. GOVERNING
LAW.  This Note shall be construed and enforced in
accor­dance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of New York, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York. The Company hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in The City of
New York, Borough of Manhattan, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper.  Nothing contained herein shall be deemed to limit in any
way any right to serve process in any manner permitted by law.  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. THE COMPANY HEREBY IRREVOCABLY WAIVES
ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

     

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

     

    (a) “Approved Stock Plan” means any
employee benefit plan which has been or hereafter is 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.

    
      
         

      

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

     

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

     

    (e) “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.

     

    (f) “Common Stock” means
(i) the Company’s shares of common stock, par value $.001 per share, and
(ii) any capital stock into which such common stock shall have been changed or
any share capital resulting from a reclassification of such common
stock.

     

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

     

    (h) “Current Subsidiaries” means,
collectively, Valley Forge Detection Systems, Inc., Valley Forge Aerospace,
Inc., Valley Forge Imaging, Inc. and Valley Forge Imaging Technologies, Inc. and
each of the foregoing, individually, a “Current
Subsidiary.”

     

    (i) “Eligible Market” means the
Principal Market, The New York or American Stock Exchange, Inc., the Nasdaq
Global Select Market, the Nasdaq Global Market or the Nasdaq Capital
Market.

     

    (j) “Equity Conditions” means: (i)
on each day during the period beginning one month prior to the applicable date
of determination and ending on and including the applicable date of
determination either (x) the applicable registration statement filed shall be
effective and the prospectus contained therein shall be available for the resale
of all of the Registrable Securities (which, solely for clarification purposes,
includes all shares of Common Stock issuable upon conversion of this Note,
including, without limitation, under Section 3) in accordance with the terms of
Section 4(n) of the Securities Purchase Agreement or (y) all Registrable
Securities shall be eligible for sale without restriction and without the need
for registration under any applicable federal or state securities laws (in each
case, disregarding any limitation on conversion or exercise); (ii) on each day
during the period beginning three months prior to the applicable date of
determination and ending on and including the applicable date of determination
(the “Equity Conditions
Measuring Period”), the shares of Common Stock (including all Registrable
Securities) are listed or designated for quotation on an Eligible Market and
shall not have been suspended from trading on an Eligible 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 an Eligible Market have been threatened (with a
reasonable prospect of delisting occurring) or pending either (A) in writing by
such Eligible Market or (B) by falling below the minimum listing maintenance
requirements of the Eligible Market on which the shares of Common Stock are then
listed; (iii) on each day during the Equity Conditions Measuring Period, the
Company shall have delivered all shares of Common Stock issuable upon conversion
of this Note on a timely basis as set forth in Section 3 hereof and all other
shares of capital stock required to be delivered by the Company on a timely
basis as set forth in the other Transaction Documents; (iv) any shares of Common
Stock to be issued in connection with the event requiring determination may be
issued in full without violating Section 3(d) hereof or the rules or regulations
of the Eligible Market on which the Common Stock is then listed; (v) on each day
during the Equity Conditions Measuring Period, no public announcement of a
pending, proposed or intended Fundamental Transaction shall have occurred which
has not been abandoned, terminated or consummated, (vi) the Company shall have
no knowledge of any fact that would reasonably be expected to cause (1) the
applicable registration statement required to be filed pursuant to Section 4(n)
of the Securities Purchase Agreement not to be effective or the prospectus
contained therein not to be available for the resale of at least all of the
Registrable Securities or (2) any Registrable Securities not to be eligible for
sale without restriction pursuant to Rule 144 under the 1933 Act and any
applicable state securities laws (in each case, disregarding any limitation on
conversion or exercise); (vii) the Holder shall not be in (and no other Buyer
shall be in) possession of any material, non-public information provided to any
of them by the Company or any of its affiliates, other than as expressly
contemplated by Section 4(i) of the Securities Purchase Agreement; (viii) on
each day during the Equity Conditions Measuring Period, the Company otherwise
shall have been in material compliance with and shall not have breached any
provision, covenant, representation or warranty of any Transaction Document; and
(ix) on each day during the Equity Conditions Measuring Period, there shall not
have occurred an Event of Default or an event that with the passage of time or
giving of notice would constitute an Event of Default.

    
      
         

      

      
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    (k) “Equity Value Redemption
Premium” means 120%.

     

    (l) "Excluded Securities" means any
Common Stock issued or issuable: (i) in connection with the Securities Purchase
Agreement, (ii) in connection with any Approved Stock Plan; (iii) upon
conversion of the Notes or the exercise of the Warrants; (iv) 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; (v) in connection with mergers, acquisitions,
strategic business partnerships or joint ventures, in each case with
non-affiliated third parties and otherwise on an arm's-length basis, the primary
purpose of which is not to raise additional capital; and (vi) upon the issuance
of Options or the exercise of any Options issued to banks or other financial
institutions in connection with (1) commercial credit agreements or (2) the
issuance of non-convertible debt by the Company, each of which the primary
purpose is not to raise additional capital.

     

    (m) “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
50% of the outstanding shares of Common Stock (not including any shares of
Common Stock held by the Person or Persons making or party to, or associated or
affiliated with the Persons making or party to, such purchase, tender or
exchange offer), or (iv) consummate a stock purchase agreement or other business
combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another Person whereby such other Person
acquires more than the 50% of the outstanding shares of Common Stock (not
including any shares of Common Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or
party to, such stock purchase agreement or other business combination), or (v)
reorganize, recapitalize or reclassify its Common Stock, or (vi) any “person” or
“group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act) is or shall become the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate
ordinary voting power represented by issued and outstanding Common
Stock.

     

    (n) “Fundamental Transaction Redemption
Premium” means 120%.

     

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

     

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

     

    (q) “Interest Conversion Rate”
means the lesser of (a) the Conversion Price and (b) the 90% of the lesser of
(i) the average of the twenty (20) VWAPs immediately prior to the applicable
Interest Date or (ii) the average of the twenty (20) VWAPs immediately prior to
the date the applicable interest payment shares are issued and delivered if
after the Interest Date.

     

    (r) “Interest Rate” means eight percent (8%)
per annum.

     

    (s) “Maturity Date” shall mean September 29,
2011; provided,
however, that
the Maturity Date may be extended at the option of the Holder (i) in the event
that, and for so long as, an Event of Default shall have occurred and be
continuing or any event shall have occurred and be continuing that with the
passage of time and the failure to cure would result in an Event of Default or
(ii) through the date that is twenty (20) Business Days after the consummation
of a Fundamental Transaction in the event that a Fundamental Transaction is
publicly announced or a Fundamental Transaction Notice is delivered prior to the
Maturity Date; provided, further, that if a
Holder elects to convert some or all of this Note pursuant to Section 3 hereof,
and the Conversion Amount would be limited pursuant to Section 3(d) hereunder,
the Maturity Date shall automatically be extended until such time as such
provision shall not limit the conversion of this Note.

    
      
         

      

      
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    (t)  “New Subsidiaries” means, as of
any date of determination, any Person (i) in which the Company after the
Subscription Date, directly or indirectly, owns or acquires any of the
outstanding capital stock or holds any equity or similar interest of such Person
or (ii) in which the Company after the Subscription Date, directly or
indirectly, controls or operates all or any part of the business, operations or
administration of such Person, and each of the foregoing, individually, a “New Subsidiary.”

     

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

     

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

     

    (w) “Permitted Indebtedness” means
(i) total Indebtedness of the Company and the Subsidiaries not to exceed
$1,7500,000 in the aggregate outstanding at any time; provided, however, that such
Indebtedness shall be made expressly subordinate in right of payment to the
Indebtedness evidenced by the Notes and the Prior Notes (as defined in the
Securities Purchase Agreement), as reflected in a written agreement acceptable
to the Required Holders and approved by the Required Holders in writing, and
which Indebtedness does not provide at any time for (A) the payment, prepayment,
repayment, repurchase or defeasance, directly or indirectly, of any principal or
premium, if any, thereon until ninety-one (91) days after the Maturity Date or
later and (B) total interest and fees at a rate in excess of the Interest Rate;
(ii) equipment leases and purchase money obligations of the Company and the
Subsidiaries not to exceed $250,000 in the aggregate outstanding at any time,
(iii) Indebtedness evidenced by this Note and the Other Notes, (iv) Indebtedness
of the Company pursuant to a traditional credit facility from a bank, financial
institution or other institutional lender, and (v) surety bonds required by the
Company, or any of its Subsidiaries, to obtain regulatory permits, licenses or
insurance as part of conducting its business.

     

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

     

    (y) “Permitted Senior
Indebtedness” means the Indebtedness
described in clauses (ii), (iv) and (v) of Permitted Indebtedness.

     

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

    
      
         

      

      
        -18-

        
          

        

      

      
         

      

    

     

    (aa) “Principal Market” means the
Over-the-Counter Bulletin Board.

     

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

     

    (cc) “Redemption Notices” means,
collectively, the Event of Default Redemption Notice and the Fundamental
Transaction Redemption Notice, and each of the foregoing, individually, a “Redemption
Notice.”

     

    (dd) “Redemption Premium” means (i)
in the case of the Events of Default described in Section 4(a) other than
Sections 4(a)(vii) through 4(a)(ix)), 120% or (ii) in the case of the Events of
Default described in Sections 4(a)(vii) through 4(a)(ix), 100%.

     

    (ee) “Redemption Prices” means,
collectively, the Event of Default Redemption Price and the Fundamental
Transaction Redemption Price, and each of the foregoing, individually, a “Redemption
Price.”

     

    (ff) “Required Holders” means MKM
Opportunity Master Fund, LLC, provided, however, if MKM Opportunity Master Fund,
LLC is no longer the holder of any Notes then “Required Holders” shall mean the
holders of Notes representing more than fifty percent (50%) of the aggregate
principal amount of the Notes then outstanding.

     

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

     

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

     

    (ii) “Subscription Date” means
September 29, 2008.

     

    (jj) “Subsidiaries” means, as of any
date of determination, collectively, all Current Subsidiaries and all New
Subsidiaries, and each of the foregoing, individually, a “Subsidiary.”

     

    (kk) “Successor Entity” means the
Person (or, if so elected by the Holder, the Parent Entity) formed by, resulting
from or surviving any Fundamental Transaction or the Person (or, if so elected
by the Holder, the Parent Entity) with which such Fundamental Transaction shall
have been entered into.

     

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

     

    (mm) “VWAP” means, for any security
as of any date, the dollar volume-weighted average price for such security on
the Principal Market (or, if the Principal Market is not the principal trading
market for such security, then on the principal securities exchange or
securities market on which such security is then traded) during the period
beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York
time, as reported by Bloomberg through its “Volume at Price” function 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, and
ending at 4:00:00 p.m., New York time, as reported by Bloomberg, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau,
Inc.). If the VWAP cannot be calculated for such security on such date on any of
the foregoing bases, the VWAP 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 in accordance with the procedures
in Section 22. All such determinations shall be appropriately adjusted for any
share dividend, share split or other similar transaction during such
period.

    
      
         

      

      
        -19-

        
          

        

      

      
         

      

    

     

    (nn) “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.

     

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

     

    [signature page
follows]

    
      
         

      

      
        -20-

        
          

        

      

      
         

      

    

     

    

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

     

    
      	
              Valley
      Forge Composite Technologies, inc.

            
	
              By:                                                                

            
	
              Name:

            
	
              Title:

            

    

    

    Each of
the undersigned, being the Subsidiaries named in the Securities Purchase
Agreement, hereby acknowledges that it will receive substantial benefit from the
loan represented by the foregoing Senior Secured Convertible Note, and
absolutely and unconditionally guarantees the payment and performance by the
Company of all of its obligations under the Senior Secured Convertible
Note.  This is a guaranty of payment and performance (and not merely
of collection), and the Holder may proceed directly against the undersigned
without any requirement to first proceed or obtain any judgment against or
exhaust any remedies with respect to the Company.  This guaranty shall
in no manner be affected or impaired by (a) any amendment, modification, waiver,
consent, compromise or other indulgence granted to the Company under or in
respect of the Senior Secured Convertible Note or any related agreement, (b) any
failure by the Holder to insist upon strict performance or observance by the
Company of any of the terms of the Senior Secured Convertible Note or any
related agreement, (c) any forbearance by the Holder, (d) any bankruptcy,
insolvency, receivership, reorganization, liquidation or other such proceeding
relating to the Company, or (e) any relief of the Company from any of its
obligations as aforesaid by operation of law, in equity or
otherwise.  This guaranty shall be subject in all cases to any
defenses (other than defenses based upon or arising out of any bankruptcy,
insolvency or reorganization of the Company) available to the Company had the
Holder proceeded directly against the Company rather than pursuant to this
guaranty.

     

    Valley Forge Detection Systems,
Inc.

     

    By:________________________________________

    Name:

    Title:

     

    Valley Forge Aerospace,
Inc.

     

    By:________________________________________

    Name:

    Title:

     

    Valley Forge Imaging,
Inc.

     

    By:________________________________________

    Name:

    Title:

     

    Valley Forge Emerging Technologies,
Inc.

     

    By:________________________________________

    Name:

    Title:

    
      
         

      

      
        -21-

        
          

        

      

      
         

      

    

    EXHIBIT
I

    

    VALLEY
FORGE COMPOSITE TECHNOLOGIES, INC.

    CONVERSION
NOTICE

     

    Reference
is made to the Senior Secured Convertible Note (the “Note”) issued to the
undersigned by Valley Forge Composite 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
shares of Common Stock, par value $.001 per share (the “Common Stock”), of the
Company, as of the date specified below.

     

    
      	
              Date
      of Conversion:

            	 
      
	
              Aggregate
      Conversion Amount to be converted:

            	 
      
	
              Please
      confirm the following information:

            
	
              Conversion
      Price:

            	 
      
	
              Number
      of shares of Common Stock to be issued:

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

            
	
              Issue
      to:

            	 
      
	 
      	 
      
	 
      	 
      
	
              Facsimile
      Number:

            	 
      
	
              Authorization:

            	 
      
	
              By:

            	 
      
	
              Title:

            	 
      
	
              Dated:

            	 
      
	
              Account
      Number:

            	 
      
	
                (if
      electronic book entry transfer)

            	 
      
	
              Transaction
      Code Number:

            	 
      
	
                (if
      electronic book entry transfer)

            	 
      

    

     

    
      
         

      

      
        -22-

        
          

        

      

      
         

      

    

    ACKNOWLEDGMENT

     

    The
Company hereby acknowledges this Conversion Notice and hereby directs
_________________ to issue the above indicated number of shares of Common Stock
in accordance with the Transfer Agent Instructions dated _____________, 2008,
from the Company and acknowledged and agreed to by
________________________.

     

    

    
      	
              Valley
      Forge Composite Technologies, Inc.

            
	
              By:

            	 
      
	
              Name:

            	 
      
	
              Title:

            	 
      

    

    

    

    

    
      
         

      

      
        -23-ex103.htm

    Exhibit
10.3

     

    NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
(I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL TO
THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE
COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR
ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH
A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.

     

    VALLEY
FORGE COMPOSITE TECHNOLOGIES, INC.

     

    Warrant
To Purchase Common Stock

     

    Warrant
No.:

    Number of
Shares of Common Stock:

    Date of
Issuance: September 29, 2008 (“Issuance Date”)

     

    Valley
Forge Composite Technologies, Inc., a Florida corporation (the “Company”), hereby certifies
that, for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, [__________________________], the registered holder
hereof or its permitted assigns (the “Holder”), is entitled, subject
to the terms set forth below, to purchase from the Company, at the Exercise
Price (as defined below) then in effect, upon exercise of this Warrant to
Purchase Common Stock (including any Warrants to Purchase Common Stock issued in
exchange, transfer or replacement hereof, the “Warrant”), at any time or
times on or after the Issuance Date, but not after 11:59 p.m., New York time, on
the Expiration Date (as defined below), [__________________] fully paid and
non-assessable shares of Common Stock (as defined below) (the “Warrant Shares”). Except as
otherwise defined herein, capitalized terms in this Warrant shall have the
meanings set forth in Section 16. This Warrant is one of the Warrants to
purchase Common Stock (the “SPA
Warrants”) issued pursuant to Section 1 of that certain Securities
Purchase Agreement, dated as of September 29, 2008, by and among the Company and
the investors (the “Buyers”) referred to therein
(the “Securities Purchase
Agreement”).

    
      
        
        

      

      
        -1-

        
          

        

      

      
        
        

      

    

     

    
      1.  EXERCISE OF
WARRANT.

    

     

    (a) Mechanics of
Exercise. Subject
to the terms and conditions hereof (including, without limitation, the
limitations set forth in Section 1(f), this Warrant may be exercised by the
Holder on any day on or after the Issuance Date, in whole or in part, by
(i) delivery of a written notice, in the form attached hereto as Exhibit A (the “Exercise Notice”), of the
Holder’s election to exercise this Warrant and (ii) (A) payment to the
Company of an amount equal to the then-applicable Exercise Price multiplied by
the number of Warrant Shares as to which this Warrant is being exercised (the
“Aggregate Exercise
Price”) in cash or wire transfer of immediately available funds or (B) by
notifying the Company that this Warrant is being exercised pursuant to a
Cashless Exercise (as defined in Section 1(d)).  The Holder shall not
be required to deliver the original of this Warrant in order to effect an
exercise hereunder. Execution and delivery of the Exercise Notice with respect
to less than all of the Warrant Shares shall have the same effect as
cancellation of the original of this Warrant and issuance of a new Warrant
evidencing the right to purchase the remaining number of Warrant Shares.
Execution and delivery of the Exercise Notice for all of the Warrant Shares
shall have the same effect as cancellation of the original of this Warrant after
delivery of the Warrant Shares in accordance with the terms hereof. On or before
the first (1st)
Trading Day following the date on which the Company has received each of the
Exercise Notice and the Aggregate Exercise Price (or notice of a Cashless
Exercise) (the “Exercise
Delivery Documents”), the Company shall transmit by facsimile an
acknowledgment of confirmation of receipt of the Exercise Delivery Documents to
the Holder and the Company’s transfer agent (the “Transfer Agent”). On or before
the third (3rd)
Trading Day following the date on which the Company has received all of the
Exercise Delivery Documents (the “Share Delivery Date”), the
Company shall (X) provided that the Transfer Agent is participating in The
Depository Trust Company (“DTC”) Fast Automated
Securities Transfer Program, upon the request of the Holder, credit such
aggregate number of shares of Common Stock to which the Holder is entitled
pursuant to such exercise to the Holder’s or its designee’s balance account with
DTC through its Deposit Withdrawal Agent Commission system, or (Y) if the
Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and deliver to the Holder or, at Holder’s instruction
pursuant to the Exercise Notice, Holder’s agent or designee, in each case, sent
by reputable overnight courier to the address as specified in the Exercise
Notice, a certificate, registered in the Company’s share register in the name of
the Holder or its designee (as indicated in the Exercise Notice), for the number
of shares of Common Stock to which the Holder is entitled pursuant to such
exercise.  Upon delivery of the Exercise Delivery Documents, the
Holder shall be deemed for all corporate purposes to have become the holder of
record of the Warrant Shares with respect to which this Warrant has been
exercised, irrespective of the date such Warrant Shares are credited to the
Holder’s DTC account or the date of delivery of the certificates evidencing such
Warrant Shares (as the case may be).  If this Warrant is submitted in
connection with any exercise pursuant to this Section 1(a) and the number of
Warrant Shares represented by this Warrant submitted for exercise is greater
than the number of Warrant Shares being acquired upon an exercise, then the
Company shall as soon as practicable and in no event later than three (3)
Business Days after any exercise and at its own expense, issue and deliver to
the Holder (or its designee) a new Warrant (in accordance with Section 7(d))
representing the right to purchase the number of Warrant Shares purchasable
immediately prior to such exercise under this Warrant, less the number of
Warrant Shares with respect to which this Warrant is exercised.  No
fractional shares of Common Stock are to be issued upon the exercise of this
Warrant, but rather the number of shares of Common Stock to be issued shall be
rounded up to the nearest whole number. The Company shall pay any and all taxes
which may be payable with respect to the issuance and delivery of Warrant Shares
upon exercise of this Warrant.

     

    (b) Exercise
Price. For
purposes of this Warrant, “Exercise Price” means $0.75,
subject to adjustment as provided herein.

    
      
        
        

      

      
        -2-

        
          

        

      

      
        
        

      

    

     

    (c) Company’s Failure to Timely
Deliver Securities.  If
the Company shall fail, for any reason or for no reason, to issue to the Holder
within three (3) Trading Days of receipt of the Exercise Delivery Documents, a
certificate for the number of shares of Common Stock to which the Holder is
entitled and register such shares of Common Stock on the Company’s share
register or to credit the Holder’s balance account with DTC for such number of
shares of Common Stock to which the Holder is entitled upon the Holder’s
exercise of this Warrant (as the case may be), then, in addition to all other
remedies available to the Holder, the Company shall pay in cash to the Holder on
each day after such third (3rd)
Trading Day that the issuance of such shares of Common Stock is not timely
effected an amount equal to 2% of the product of (A) the sum of the number of
shares of Common Stock not issued to the Holder on a timely basis and to which
the Holder is entitled and (B) the Closing Sale Price of the Common Stock on the
Trading Day immediately preceding the last possible date which the Company could
have issued such shares of Common Stock to the Holder without violating Section
1(a). In addition to the foregoing, if within three (3) Trading Days after the
Company’s receipt of the facsimile copy of an Exercise Notice, the Company shall
fail to issue and deliver a certificate to the Holder and register such shares
of Common Stock on the Company’s share register or credit the Holder’s balance
account with DTC for the number of shares of Common Stock to which the Holder is
entitled upon such Holder’s exercise hereunder (as the case may be), and if on
or after such third (3rd)
Trading Day the Holder purchases (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by the Holder of
shares of Common Stock issuable upon such exercise that the Holder anticipated
receiving from the Company (a “Buy-In”), then the Company
shall, within three (3) Business 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
shares of Common Stock so purchased (the “Buy-In Price”), at which point
the Company’s obligation to deliver such certificate (and to issue such shares
of Common Stock) shall terminate, or (ii) promptly honor its obligation to
deliver to the Holder a certificate or certificates representing such shares of
Common Stock or credit the Holder’s balance account with DTC for the number of
shares of Common Stock to which the Holder is entitled upon such Holder’s
exercise hereunder (as the case may be) and pay cash to the Holder in an amount
equal to the excess (if any) of the Buy-In Price over the product of (A) such
number of shares of Common Stock times (B) the Closing Sale Price of the Common
Stock on the Trading Day immediately preceding the date of the Exercise
Notice.

     

    (d) Cashless
Exercise.
Notwithstanding anything contained herein to the contrary (other than Section
1(f) below), the Holder may, in its sole discretion, exercise this Warrant in
whole or in part and, in lieu of making the cash payment otherwise contemplated
to be made to the Company upon such exercise in payment of the Aggregate
Exercise Price, elect instead to receive upon such exercise the “Net Number” of
shares of Common Stock determined according to the following formula (a “Cashless Exercise”) but only
so long as the Warrant Shares are not covered by an existing and effective
registration statement at any time after the six (6) month anniversary date of
the Issuance Date:

     

    Net Number = (A x B) - (A x
C)

     

    B

     

    For purposes of the foregoing
formula:

     

    A= the
total number of shares with respect to which this Warrant is then being
exercised.

     

    B= the
average VWAP for the Common Stock for the five (5) consecutive Trading Days
immediately preceding the date of the Exercise Notice.

     

    C= the
Exercise Price then in effect for the applicable Warrant Shares at the time of
such exercise.

    
      
        
        

      

      
        -3-

        
          

        

      

      
        
        

      

    

     

    (e) Disputes.  In
the case of a dispute as to the determination of the Exercise Price or the
arithmetic calculation of the number of Warrant Shares to be issued pursuant to
the terms hereof, the Company shall promptly issue to the Holder the number of
Warrant Shares that are not disputed and resolve such dispute in accordance with
Section 13.

     

    (f) Limitations on
Exercises.

     

    (i) Beneficial Ownership.
Notwithstanding anything to the contrary contained in this Warrant, this Warrant
shall not be exercisable by the Holder hereof to the extent (but only to the
extent) that, if exercisable by the Holder, the Holder or any of its affiliates
would beneficially own in excess of 9.99% (the “Maximum Percentage”) of the
outstanding shares of Common Stock. To the extent the above limitation
applies, the determination of whether this Warrant shall be exercisable
(vis-à-vis other convertible, exercisable or exchangeable securities owned by
the Holder) and of which warrants shall be exercisable (as among all warrants
owned by the Holder) shall, subject to such Maximum Percentage limitation, be
determined on the basis of the first submission to the Company for conversion,
exercise or exchange (as the case may be). No prior inability to exercise this
Warrant pursuant to this paragraph shall have any effect on the applicability of
the provisions of this paragraph with respect to any subsequent
determination of exercisability. For the purposes of this paragraph, beneficial
ownership and all determinations and calculations (including, without
limitation, with respect to calculations of percentage ownership) shall be
determined by the Holder in accordance with Section 13(d) of the 1934 Act (as
defined in the Securities Purchase Agreement) and the rules and regulations
promulgated thereunder. The provisions of this paragraph shall be implemented in
a manner otherwise than in strict conformity with the terms of this paragraph to
correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Maximum Percentage beneficial ownership
limitation herein contained or to make changes or supplements necessary or
desirable to properly give effect to such Maximum Percentage limitation. The
limitations contained in this paragraph shall apply to a successor Holder of
this Warrant. For any reason at any time, upon the written or oral request of
the Holder, the Company shall within one (1) Business Day confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding,
including by virtue of any prior conversion or exercise of convertible or
exercisable securities into Common Stock, including, without limitation,
pursuant to this Warrant or securities issued pursuant to the Securities
Purchase Agreement.  Each delivery of an Exercise Notice by the Holder
will constitute a representation by the Holder that it has evaluated the
limitation set forth in this paragraph and determined that issuance of the full
number of Warrant Shares requested by the Holder in such Exercise Notice is
permitted under this paragraph.

     

    (g) Insufficient Authorized
Shares. The
Company shall at all times keep reserved for issuance under this Warrant a
number of shares of Common Stock as shall be necessary to satisfy the Company’s
obligation to issue shares of Common Stock hereunder (without regard to any
limitation otherwise contained herein with respect to the number of shares of
Common Stock that may be acquirable upon exercise of this Warrant). If,
notwithstanding the foregoing, and not in limitation thereof, at any time while
any of the SPA Warrants remain outstanding the Company does not have a
sufficient number of authorized and unreserved shares of Common Stock to satisfy
its obligation to reserve for issuance upon exercise of the SPA Warrants at
least a number of shares of Common Stock equal to the number of shares of Common
Stock as shall from time to time be necessary to effect the exercise of all of
the SPA Warrants then outstanding (the “Required Reserve Amount”) (an
“Authorized Share
Failure”), then the Company shall immediately take all action necessary
to increase the Company’s authorized shares of Common Stock to an amount
sufficient to allow the Company to reserve the Required Reserve Amount for all
the SPA Warrants then outstanding. Without limiting the generality of the
foregoing sentence, as soon as practicable after the date of the occurrence of
an Authorized Share Failure, but in no event later than sixty (60) days after
the occurrence of such Authorized Share Failure, the Company shall hold a
meeting of its stockholders for the approval of an increase in the number of
authorized shares of Common Stock. In connection with such meeting, the Company
shall provide each stockholder with a proxy statement and shall use its best
efforts to solicit its stockholders’ approval of such increase in authorized
shares of Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal.

     

    2. ADJUSTMENT OF EXERCISE PRICE
AND NUMBER OF WARRANT SHARES. The Exercise Price and number of Warrant
Shares issuable upon exercise of this Warrant are subject to adjustment from
time to time as set forth in this Section 2.

    
      
        
        

      

      
        -4-

        
          

        

      

      
        
        

      

    

     

    (a) Stock Dividends and
Splits.  If
the Company, at any time on or after the date of the Securities Purchase
Agreement, (i) pays a stock dividend on one or more classes of its then
outstanding shares of Common Stock or otherwise makes a distribution on any
class of capital stock that is payable in shares of Common Stock, (ii)
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its then outstanding shares of Common Stock into a larger
number of shares or (iii) combines (by combination, reverse stock split or
otherwise) one or more classes of its then outstanding shares of Common Stock
into a smaller number of shares, then in each such case the Exercise Price shall
be multiplied by a fraction of which the numerator shall be the number of shares
of Common Stock outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately after such event.  Any adjustment made pursuant to clause
(i) of this paragraph shall become effective immediately after the record date
for the determination of stockholders entitled to receive such dividend or
distribution, and any adjustment pursuant to clause (ii) or (iii) of this
paragraph shall become effective immediately after the effective date of such
subdivision or combination. If any event requiring an adjustment under this
paragraph occurs during the period that an Exercise Price is calculated
hereunder, then the calculation of such Exercise Price shall be adjusted
appropriately to reflect such event.

     

    (b) Adjustment Upon Issuance of
Shares of Common Stock. If and
whenever from and after the date of the Securities Purchase Agreement and to and
through the date that is two (2) years after the date of the Securities Purchase
Agreement, the Company issues or sells, or in accordance with this Section 2 is
deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account
of the Company, but excluding any Excluded Securities (as defined in the
Securities Purchase Agreement) issued or sold or deemed to have been issued or
sold) for a consideration per share (the “New Issuance Price”) less than
a price equal to the Exercise Price in effect immediately prior to such issue or
sale or deemed issuance or sale (such lesser price being referred to as the
“Applicable Price”) (the
foregoing a “Dilutive
Issuance”), then immediately after such Dilutive Issuance, the Exercise
Price then in effect shall be reduced to an amount equal to the New Issuance
Price. For purposes of determining the adjusted Exercise Price under this
Section 2(b), the following shall be applicable:

     

    (i) Issuance of
Options.  If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion, exercise or
exchange of any Convertible Securities issuable upon exercise of any such Option
is less than the Applicable Price, then such share of Common Stock shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the granting or sale of such Option for such price per share. For
purposes of this Section 2(b)(i), the “lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Options or upon
conversion, exercise or exchange of any Convertible Securities issuable upon
exercise of any such Option” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon the granting or sale of the Option, upon exercise
of the Option and upon conversion, exercise or exchange of any Convertible
Security issuable upon exercise of such Option. Except as contemplated below, no
further adjustment of the Exercise Price shall be made upon the actual issuance
of such shares of Common Stock or of such Convertible Securities upon the
exercise of such Options or upon the actual issuance of such shares of Common
Stock upon conversion, exercise or exchange 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 share of
Common Stock is issuable upon the conversion, exercise or exchange thereof is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the issuance or sale of such Convertible Securities for such price per
share.  For the purposes of this Section 2(b)(ii), the “lowest price
per share for which one share of Common Stock is issuable upon the conversion,
exercise or exchange thereof” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to one
share of Common Stock upon the issuance or sale of the Convertible Security and
upon conversion, exercise or exchange of such Convertible Security. Except as
contemplated below, no further adjustment of the Exercise Price shall be made
upon the actual issuance of such shares of Common Stock upon conversion,
exercise or exchange 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 this Warrant has been or is to be made pursuant to other
provisions of this Section 2(b), except as contemplated below, no further
adjustment of the Exercise Price shall be made by reason of such issue or
sale.

    
      
        
        

      

      
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    (iii) Change in Option Price or
Rate of Conversion. If the purchase or exercise price provided for in any
Options, the additional consideration, if any, payable upon the issue,
conversion, exercise or exchange of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exercisable or
exchangeable for shares of Common Stock increases or decreases at any time, the
Exercise Price in effect at the time of such increase or decrease shall be
adjusted to the Exercise Price which would have been in effect at such time had
such Options or Convertible Securities provided for such increased or decreased
purchase price, additional consideration or increased or decreased conversion
rate, as the case may be, at the time initially granted, issued or sold. For
purposes of this Section 2(b)(iii), if the terms of any Option or Convertible
Security that was outstanding as of the date of issuance of this Warrant are
increased or decreased in the manner described in the immediately preceding
sentence, then such Option or Convertible Security and the shares of Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such increase or decrease. No
adjustment pursuant to this Section 2(b) shall be made if such adjustment would
result in an increase of the Exercise 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 the
difference of (i) the aggregate fair market value of such Options and other
securities issued or sold in such integrated transaction, less (ii) the fair
market value of the securities other than such Option, issued or sold in such
transaction and the other securities issued or sold in such integrated
transaction will be deemed to have been issued or sold for the balance of the
consideration received by the Company.  If any shares of Common Stock,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to
be the net amount received by the Company therefor. If any shares of Common
Stock, Options or Convertible Securities are issued or sold for a consideration
other than cash, the amount of such consideration received by the Company will
be the fair value of such consideration, except where such consideration
consists of publicly traded securities, in which case the amount of
consideration received by the Company for such securities will be the average
VWAP of such security for the five (5) Trading Day period immediately preceding
the date of receipt. If any shares of Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such shares of Common Stock, Options or Convertible Securities, as the case may
be. The fair value of any consideration other than cash or publicly traded
securities will be determined jointly by the Company and the Holder. 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 such Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the Holder. The determination of such appraiser
shall be final and 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 shares of Common Stock for the purpose
of entitling them (A) to receive a dividend or other distribution payable
in shares of Common Stock, Options or in Convertible Securities or (B) to
subscribe for or purchase shares of Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase (as the case may
be).

     

    (c) Number of Warrant
Shares.
Simultaneously with any adjustment to the Exercise Price pursuant to paragraphs
(a) or (b) of this Section 2, the number of Warrant Shares that may be purchased
upon exercise of this Warrant shall be increased or decreased proportionately,
so that after such adjustment the aggregate Exercise Price payable hereunder for
the adjusted number of Warrant Shares shall be the same as the aggregate
Exercise Price in effect immediately prior to such adjustment (without regard to
any limitations on exercise contained herein).

     

    (d) Other
Events. In the
event that the Company (or any direct or indirect subsidiary thereof) shall
take any action to which the provisions hereof are not strictly applicable, or,
if applicable, would not operate to protect the Holder from dilution or if any
event occurs of the type contemplated by the provisions of this Section 2 but
not expressly provided for by such provisions (including, without limitation,
the granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company’s Board of Directors shall in good faith
determine and implement an appropriate adjustment in the Exercise Price and the
number of Warrant Shares (if applicable) so as to protect the rights of the
Holder; provided that no such
adjustment pursuant to this Section 2(d) will increase the Exercise Price or
decrease the number of Warrant Shares as otherwise determined pursuant to this
Section 2, provided further that
if the Holder does not accept such adjustments as appropriately protecting its
interests hereunder against such dilution, then the Company’s Board of Directors
and the Holder shall agree, in good faith, upon an independent investment bank
of nationally recognized standing to make such appropriate adjustments, whose
determination shall be final and binding and whose fees and expenses shall be
borne by the Company.

    
      
        
        

      

      
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    (e) Calculations. All
calculations under this Section 2 shall be made to the nearest cent or the
nearest 1/100th of a
share, as applicable. The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the account of the
Company, and the disposition of any such shares shall be considered an issue or
sale of Common Stock.

     

    3. RIGHTS UPON DISTRIBUTION OF
ASSETS. If the Company shall declare or make any dividend or other
distribution of its assets (or rights to acquire its assets) to holders of
shares of Common Stock, by way of return of capital or otherwise (including,
without limitation, any distribution of cash, stock or other securities,
property or options by way of a dividend, spin off, reclassification, corporate
rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time
after the issuance of this Warrant, then, in each such case, the Holder shall be
entitled to participate in such Distribution to the same extent that the Holder
would have participated therein if the Holder had held the number of shares of
Common Stock acquirable upon complete exercise of this Warrant (without regard
to any limitations on exercise hereof, including without limitation, the Maximum
Percentage) immediately before the date on which a record is taken for such
Distribution, or, if no such record is taken, the date as of which the record
holders of shares of Common Stock are to be determined for the participation in
such Distribution (provided, however, that to the
extent that the Holder’s right to participate in any such Distributions would
result in the Holder exceeding the Maximum Percentage, then the Holder shall not
be entitled to participate in such Distribution to such extent (or the
beneficial ownership of any such shares of Common Stock as a result of such
Distribution to such extent) and such Distribution to such extent shall be held
in abeyance for the benefit of the Holder until such time, if ever, as its right
thereto would not result in the Holder exceeding the Maximum
Percentage).

     

    
      4.  PURCHASE RIGHTS; FUNDAMENTAL
TRANSACTIONS.

    

     

    (a) Purchase
Rights.  In
addition to any adjustments pursuant to Section 2 above, if at any time the
Company grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of shares of Common Stock (the “Purchase Rights”), then the
Holder will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which the Holder could have acquired if
the Holder had held the number of shares of Common Stock acquirable upon
complete exercise of this Warrant (without regard to any limitations on exercise
hereof, including without limitation, the Maximum Percentage) 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 shares of Common Stock are to be determined for the grant, issue or
sale of such Purchase Rights (provided, however, that to the
extent that the Holder’s right to participate in any such Purchase Right would
result in the Holder exceeding the Maximum Percentage, then the Holder shall not
be entitled to participate in such Purchase Right to such extent (or beneficial
ownership of such shares of Common Stock as a result of such Purchase Right to
such extent) and such Purchase Right to such extent shall be held in abeyance
for the Holder until such time, if ever, as its right thereto would not result
in the Holder exceeding the Maximum Percentage).

     

    (b) Fundamental
Transactions.  The
Company shall not enter into or be party to a Fundamental Transaction unless
(i)  the Successor Entity assumes in writing all of the obligations of the
Company under this Warrant and the other Transaction Documents (as defined in
the Securities Purchase Agreement) in accordance with the provisions of this
Section 4(b) pursuant to written agreements in form and substance satisfactory
to the Holder and approved by the Holder prior to such Fundamental Transaction,
including agreements to deliver to the Holder in exchange for this Warrant a
security of the Successor Entity evidenced by a written instrument substantially
similar in form and substance to this Warrant, including, without limitation,
which is exercisable for a corresponding number of shares of capital stock
equivalent to the shares of Common Stock acquirable and receivable upon exercise
of this Warrant (without regard to any limitations on the exercise of this
Warrant) prior to such Fundamental Transaction, and with an exercise price which
applies the exercise price hereunder to such shares of capital stock (but taking
into account the relative value of the shares of Common Stock pursuant to such
Fundamental Transaction and the value of such shares of capital stock, such
adjustments to the number of shares of capital stock and such exercise price
being for the purpose of protecting the economic value of this Warrant
immediately prior to the consummation of such Fundamental Transaction), and
which is satisfactory in form and substance to the Holder and (ii) the
Successor Entity (including its Parent Entity) is a publicly traded corporation
whose common stock is quoted on or listed for trading on an Eligible Market.
Upon the occurrence of any Fundamental Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Warrant and the other
Transaction Documents 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 Warrant and the
other Transaction Documents with the same effect as if such Successor Entity had
been named as the Company herein. Upon consummation of the Fundamental
Transaction, the Successor Entity shall deliver to the Holder confirmation that
there shall be issued upon exercise of this Warrant at any time after the
consummation of the Fundamental Transaction, in lieu of the shares of the Common
Stock (or other securities, cash, assets or other property (except such items
still issuable under Sections 3 and 4(a) above, which shall continue to be
receivable thereafter)) issuable upon the exercise of this Warrant prior to such
Fundamental Transaction, such shares of the publicly traded Common Stock (or its
equivalent) of the Successor Entity (including its Parent Entity) which the
Holder would have been entitled to receive upon the happening of such
Fundamental Transaction had this Warrant been exercised immediately prior to
such Fundamental Transaction (without regard to any limitations on the exercise
of this Warrant), as adjusted in accordance with the provisions of this Warrant.
In addition to and not in substitution for any other rights hereunder, prior to
the consummation of any Fundamental Transaction pursuant to which holders of
shares of Common Stock are entitled to receive securities or other assets with
respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company
shall make appropriate provision to insure that the Holder will thereafter have
the right to receive upon an exercise of this Warrant at any time after the
consummation of the Fundamental Transaction but prior to the Expiration Date, in
lieu of the shares of the Common Stock (or other securities, cash, assets or
other property (except such items still issuable under Sections 3 and 4(a)
above, which shall continue to be receivable thereafter)) issuable upon the
exercise of the Warrant prior to such Fundamental Transaction, such shares of
stock, 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
the Warrant been exercised immediately prior to such Fundamental Transaction
(without regard to any limitations on the exercise of this Warrant). Provision
made pursuant to the preceding sentence shall be in a form and substance
reasonably satisfactory to the Holder. The provisions of this Section 4 shall
apply similarly and equally to successive Fundamental Transactions and Corporate
Events and shall be applied as if this Warrant (and any such subsequent
warrants) were fully exercisable and without regard to any limitations on the
exercise of this Warrant (provided that the
Holder shall continue to be entitled to the benefit of the Maximum Percentage,
applied however with respect to shares of capital stock registered under the
1934 Act and thereafter receivable upon exercise of this Warrant (or any such
other warrant)).

    
      
        
        

      

      
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    (c) Black Scholes
Value. No
sooner than fifteen (15) days nor later than ten (10) days prior to the
consummation of a Fundamental Transaction, but not prior to the public
announcement of such Fundamental Transaction, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a "Fundamental Transaction
Notice").  Notwithstanding the foregoing, in the event of a
Fundamental Transaction in which a Successor Entity that is a publicly traded
corporation whose stock is quoted or listed for trading on an Eligible Market
does not assume this Warrant such that the Warrant shall be exercisable for the
publicly traded Common Stock of such Successor Entity, then at the request of
the Holder delivered before the ninetieth (90th) day
after the consummation of such Fundamental Transaction, the Company or the
Successor Entity (as the case may be) shall purchase this Warrant from the
Holder by paying to the Holder cash in an amount equal to the Black Scholes
Value of the remaining unexercised portion of this Warrant on the date of the
consummation of such Fundamental Transaction.

     

    5. 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 Warrant, and will at all
times in good faith carry out all the provisions of this Warrant and take all
action as may be required to protect the rights of the Holder. Without limiting
the generality of the foregoing, the Company (i) shall not increase the par
value of any shares of Common Stock receivable upon the exercise of this Warrant
above the Exercise Price then in effect, (ii) shall take all such actions
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable shares of Common Stock upon the
exercise of this Warrant, and (iii) shall, so long as any of the SPA Warrants
are outstanding, take all action necessary to reserve and keep available out of
its authorized and unissued shares of Common Stock, solely for the purpose of
effecting the exercise of the SPA Warrants, the maximum number of shares of
Common Stock as shall from time to time be necessary to effect the exercise of
the SPA Warrants then outstanding (without regard to any limitations on
exercise).

     

    6. WARRANT HOLDER NOT DEEMED A
STOCKHOLDER. Except as otherwise specifically provided herein, the
Holder, solely in such Person’s capacity as a holder of this Warrant, shall not
be entitled to vote or receive dividends or be deemed the holder of share
capital of the Company for any purpose, nor shall anything contained in this
Warrant be construed to confer upon the Holder, solely in such Person’s capacity
as the Holder of this Warrant, any of the rights of a stockholder of the Company
or any right to vote, give or withhold consent to any corporate action (whether
any reorganization, issue of stock, reclassification of stock, consolidation,
merger, conveyance or otherwise), receive notice of meetings, receive dividends
or subscription rights, or otherwise, prior to the issuance to the Holder of the
Warrant Shares which such Person is then entitled to receive upon the due
exercise of this Warrant.  In addition, nothing contained in this
Warrant shall be construed as imposing any liabilities on the Holder to purchase
any securities (upon exercise of this Warrant or otherwise) or as a stockholder
of the Company, whether such liabilities are asserted by the Company or by
creditors of the Company. Notwithstanding this Section 6, the Company shall
provide the Holder with copies of the same notices and other information given
to the stockholders of the Company generally, contemporaneously with the giving
thereof to the stockholders.

     

    7. REISSUANCE OF
WARRANTS.

     

    (a) Transfer of
Warrant. If this
Warrant is to be transferred, the Holder shall surrender this Warrant to the
Company, whereupon the Company will forthwith issue and deliver upon the order
of the Holder a new Warrant (in accordance with Section 7(d)), registered as the
Holder may request, representing the right to purchase the number of Warrant
Shares being transferred by the Holder and, if less than the total number of
Warrant Shares then underlying this Warrant is being transferred, a new Warrant
(in accordance with Section 7(d)) to the Holder representing the right to
purchase the number of Warrant Shares not being transferred.

     

    (b) Lost, Stolen or Mutilated
Warrant. Upon
receipt by the Company of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant (as to which a written
certification and the indemnification contemplated below shall suffice as such
evidence), and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary and
reasonable form and, in the case of mutilation, upon surrender and cancellation
of this Warrant, the Company shall execute and deliver to the Holder a new
Warrant (in accordance with Section 7(d)) representing the right to purchase the
Warrant Shares then underlying this Warrant.

     

    (c) Exchangeable for Multiple
Warrants. This
Warrant is exchangeable, upon the surrender hereof by the Holder at the
principal office of the Company, for a new Warrant or Warrants (in accordance
with Section 7(d)) representing in the aggregate the right to purchase the
number of Warrant Shares then underlying this Warrant, and each such new Warrant
will represent the right to purchase such portion of such Warrant Shares as is
designated by the Holder at the time of such surrender; provided, however, that no
warrants for fractional shares of Common Stock shall be given.

    
      
        
        

      

      
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    (d) Issuance of New
Warrants.
Whenever the Company is required to issue a new Warrant pursuant to the terms of
this Warrant, such new Warrant (i) shall be of like tenor with this Warrant,
(ii) shall represent, as indicated on the face of such new Warrant, the right to
purchase the Warrant Shares then underlying this Warrant (or in the case of a
new Warrant being issued pursuant to Section 7(a) or Section 7(c), the Warrant
Shares designated by the Holder which, when added to the number of shares of
Common Stock underlying the other new Warrants issued in connection with such
issuance, does not exceed the number of Warrant Shares then underlying this
Warrant), (iii) shall have an issuance date, as indicated on the face of such
new Warrant which is the same as the Issuance Date, and (iv) shall have the same
rights and conditions as this Warrant.

     

    8. NOTICES.  Whenever
notice is required to be given under this Warrant, 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 Warrant, 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 each adjustment of the Exercise Price and the
number of Warrant Shares, setting forth in reasonable detail, and certifying,
the calculation of such adjustment(s) and (ii) at least fifteen (15) 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 shares of Common Stock, (B)
with respect to any grants, issuances or sales of any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
to holders of shares of Common Stock or (C) for determining rights to vote with
respect to any Fundamental Transaction, dissolution or liquidation, provided in
each case that such information shall be made known to the public prior to or in
conjunction with such notice being provided to the Holder and (iii) at least ten
(10) Trading Days prior to the consummation of any Fundamental
Transaction.  To the extent that any notice provided hereunder
constitutes, or contains, material, non-public information regarding the Company
or any of its subsidiaries, the Company shall simultaneously file such notice
with the SEC (as defined in the Securities Purchase Agreement) pursuant to a
Current Report on Form 8-K.

     

    9. AMENDMENT AND
WAIVER.  Except as otherwise provided herein, the provisions of
this Warrant (other than Section 1(f)(i)) may be amended and the Company may
take any action herein prohibited, or omit to perform any act herein required to
be performed by it, only if the Company has obtained the written consent of the
Holder. The Holder shall be entitled, at its option, to the benefit of any
amendment of any other similar warrant issued either under the Securities
Purchase Agreement or any other similar warrant. No waiver shall be effective
unless it is in writing and signed by an authorized representative of the
waiving party.

     

    10. SEVERABILITY.  If
any provision of this Warrant or the application thereof becomes or is declared
by a court of competent jurisdiction to be illegal, void or unenforceable, the
remainder of the terms of this Warrant will continue in full force and
effect.

     

    11. GOVERNING LAW. This
Warrant shall be governed by and construed and enforced in accor­dance with,
and all questions concerning the construction, validity, interpretation and
performance of this Warrant 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.

     

    12. CONSTRUCTION;
HEADINGS. This Warrant shall be deemed to be jointly drafted by the
Company and the Holder and shall not be construed against any Person as the
drafter hereof.  The headings of this Warrant are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Warrant. Terms used in this Warrant but defined in the other Transaction
Documents shall have the meanings ascribed to such terms on the Closing Date in
such other Transaction Documents unless otherwise consented to in writing by the
Holder.

     

    13. DISPUTE RESOLUTION.
In the case of a dispute as to the determination of the Exercise Price or fair
market value or the arithmetic calculation of the Warrant Shares, the Company or
the Holder (as the case may be) shall submit the disputed determinations or
arithmetic calculations (as the case may be) via facsimile within two (2)
Business Days of receipt of the applicable notice giving rise to such dispute to
the Company or the Holder (as the case may be). If the Holder and the Company
are unable to agree upon such determination or calculation of the Exercise Price
or fair market value or the number of Warrant Shares (as the case may be) within
three (3) Business Days of such disputed determination or arithmetic calculation
being submitted to the Company or the Holder (as the case may be), then the
Company shall, within two (2) Business Days submit via facsimile (a) the
disputed determination of the Exercise Price or fair market value to an
independent, reputable investment bank selected by the Company and approved by
the Holder or (b) the disputed arithmetic calculation of the Warrant Shares to
the Company’s independent, outside accountant. The Company shall cause at its
expense the investment bank or the accountant (as the case may be) to perform
the determinations or calculations (as the case may be) and notify the Company
and the Holder of the results no later than ten (10) Business Days from the time
it receives such disputed determinations or calculations (as the case may be).
Such investment bank’s or accountant’s determination or calculation (as the case
may be) shall be binding upon all parties absent demonstrable
error.

    
      
        
        

      

      
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    14. REMEDIES, CHARACTERIZATION,
OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The
remedies provided in this Warrant shall be cumulative and in addition to all
other remedies available under this Warrant and 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 right of the Holder to
pursue actual damages for any failure by the Company to comply with the terms of
this Warrant. 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 of this Warrant 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. The issuance of shares and
certificates for shares as contemplated hereby upon the exercise of this Warrant
shall be made without charge to the Holder or such shares for any issuance tax
or other costs in respect thereof, provided that the Company shall not be
required to pay any tax which may be payable in respect of any transfer involved
in the issuance and delivery of any certificate in a name other than the Holder
or its agent on its behalf. The Company covenants to the Holder that there shall
be no characterization concerning this instrument other than as expressly
provided herein.

     

    15. TRANSFER.   This
Warrant may be offered for sale, sold, transferred or assigned without the
consent of the Company, except as may otherwise be required by Section 2(g) of
the Securities Purchase Agreement.

     

    16. CERTAIN
DEFINITIONS.  For purposes of this Warrant, the following terms
shall have the following meanings:

     

    (a) “Black Scholes Value” means the
value of this Warrant based on the Black and Scholes Option Pricing Model
obtained from the “OV” function on Bloomberg determined as of the day of closing
of the applicable Fundamental Transaction for pricing purposes and reflecting
(i) a risk-free interest rate corresponding to the U.S. Treasury rate for a
period equal to the remaining term of this Warrant as of such date of request,
(ii) an expected volatility equal to the greater of 75% and the 100 day
volatility obtained from the HVT function on Bloomberg as of the trading
day immediately following the public announcement of the applicable Fundamental
Transaction and (iii) the underlying price per share used in such calculation
shall be the sum of the price per share being offered in cash, if any, plus the
value of any non cash consideration, if any, being offered in such Fundamental
Transaction.

     

    (b) “Bloomberg” means Bloomberg
Financial Markets.

     

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

     

    (d)           “Closing Sale Price” means, for
any security as of any date, the last closing trade price for such security on
the Principal Market, as reported by Bloomberg, or, if the Principal Market
begins to operate on an extended hours basis and does not designate the closing
trade price, then the last trade price of such security prior to 4:00:00 p.m.,
New York time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last
trade price of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing does not apply, the last trade price of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no last trade price is reported for such security
by Bloomberg, the average of the ask prices 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 Sale Price cannot be calculated
for a security on a particular date on any of the foregoing bases, the Closing
Sale 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 in accordance with the procedures in Section 13.
All such determinations shall appropriately adjusted for any share dividend,
share split, share combination or other similar transaction during such
period.

     

    (e) “Common Stock” means
(i) the Company’s shares of common stock, par value $.001 per share, and
(ii) any capital stock into which such common stock shall have been changed or
any share capital resulting from a reclassification of such common
stock.

     

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

    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

     

    (g) “Eligible Market” means the The
New York or American Stock Exchange, Inc., the Nasdaq Global Select Market, the
Nasdaq Global Market, the Nasdaq Capital Market or the Principal
Market.

     

    (h) “Expiration Date” means the
date that is the seventh (7th)
anniversary of the Issuance Date or, if such date falls on a day other than a
Business Day or on which trading does not take place on the Principal Market (a
“Holiday”), the next
date that is not a Holiday.

     

    (i) “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 shares of Common Stock (not including any shares of
Common Stock held by the Person or Persons making or party to, or associated or
affiliated with the Persons making or party to, such purchase, tender or
exchange offer), or (iv) consummate a stock purchase agreement or other business
combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another Person whereby such other Person
acquires more than the 50% of the outstanding shares of Common Stock (not
including any shares of Common Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or
party to, such stock purchase agreement or other business combination), or (v)
reorganize, recapitalize or reclassify its Common Stock, or (vi) any “person” or
“group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act) is or shall become the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate
ordinary voting power represented by issued and outstanding Common
Stock.

     

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

     

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

     

    (l) “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.

     

    (m) “Principal Market” means the
Over-the-Counter Bulletin Board.

     

    (n) “Successor Entity” means the
Person (or, if so elected by the Holder, the Parent Entity) formed by, resulting
from or surviving any Fundamental Transaction or the Person (or, if so elected
by the Holder, the Parent Entity) with which such Fundamental Transaction shall
have been entered into.

     

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

     

    (p) “VWAP” means, for any security
as of any date, the dollar volume-weighted average price for such security on
the Principal Market (or, if the Principal Market is not the principal trading
market for such security, then on the principal securities exchange or
securities market on which such security is then traded) during the period
beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York
time, as reported by Bloomberg through its “Volume at Price” function 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, and
ending at 4:00:00 p.m., New York time, as reported by Bloomberg, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau,
Inc.). If VWAP cannot be calculated for such security on such date on any of the
foregoing bases, the VWAP 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 in accordance with the procedures in Section 13.
All such determinations shall be appropriately adjusted for any share dividend,
share split or other similar transaction during such period.

     

    [signature page
follows]

    
      
        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    

     

    IN WITNESS WHEREOF, the
Company has caused this Warrant to Purchase Common Stock to be duly executed as
of the Issuance Date set forth above.

     

    
      	
               
      

            	
              VALLEY
      FORGE COMPOSITE TECHNOLOGIES, INC.

            

    

     

                                                               By:____________________________________

    Name:

    Title:

    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
A

     

    EXERCISE
NOTICE

    TO
BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

    WARRANT
TO PURCHASE COMMON STOCK

     

    VALLEY
FORGE COMPOSITE TECHNOLOGIES, INC.

     

    The
undersigned holder hereby exercises the right to purchase _________________ of
the shares of Common Stock (“Warrant Shares”) of Valley
Forge Composite Technologies, Inc., a Florida corporation (the “Company”), evidenced by
Warrant to Purchase Common Stock No. _______ (the “Warrant”). Capitalized terms
used herein and not otherwise defined shall have the respective meanings set
forth in the Warrant.

     

    1.           Form of Exercise
Price.  The Holder intends that payment of the Exercise Price
shall be made as:

     

    
      	
               
      

            	
              ____________

            	
              a
      “Cash
      Exercise” with respect to _________________ Warrant Shares;
      and/or

            

    

     

    
      	
               
      

            	
              ____________

            	
              a
      “Cashless
      Exercise” with respect to _______________ Warrant
      Shares.

            

    

     

    2.           Payment of Exercise
Price.  In the event that the Holder has elected a Cash
Exercise with respect to some or all of the Warrant Shares to be issued pursuant
hereto, the Holder shall pay the Aggregate Exercise Price in the sum of
$___________________ to the Company in accordance with the terms of the
Warrant.

     

    3.           Delivery of Warrant
Shares.  The Company shall deliver to Holder, or its designee
or agent as specified below, __________ Warrant Shares in accordance with the
terms of the Warrant.  Delivery shall be made to Holder, or for its
benefit, to the following address:

     

    _______________________

    _______________________

    _______________________

    _______________________

     

    Date:
_______________ __, 20__

     

    

       Name
of Registered Holder

     

    By:                                                      

    Name:

    Title:

    
      
        
        

      

      
        -13-

        
          

        

      

      
        
        

      

    

     

    ACKNOWLEDGMENT

     

    The
Company hereby acknowledges this Exercise Notice and hereby directs
______________ to issue the above indicated number of shares of Common Stock in
accordance with the Transfer Agent Instructions dated _____________, 2008, from
the Company and acknowledged and agreed to by _______________.

     

    
      	
               
      

            	
              VALLEY
      FORGE COMPOSITE TECHNOLOGIES, INC.

            

    

     

                                                               By:____________________________________

    Name:

    Title:

     

    

    
      
        
        

      

      
        -14-

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