Document:

ex4_1.htm

    
      

    

    Exhibit
4.1

     

    SECURITIES
PURCHASE AGREEMENT

     

    SECURITIES PURCHASE AGREEMENT
(the "Agreement"), dated
as of August 14, 2008, by and among Arotech Corporation, a Delaware corporation,
with headquarters located at 1229 Oak Valley Drive, Ann Arbor Michigan 48108
(the "Company"),
and the investors listed on the Schedule of Buyers attached hereto
(individually, a "Buyer"
and collectively, the "Buyers").

     

    WHEREAS:

     

    A.           The
Company and each Buyer is executing and delivering this Agreement in reliance
upon the exemption from securities registration afforded by Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"), and Rule 506 of
Regulation D ("Regulation D") as
promulgated by the United States Securities and Exchange Commission (the "SEC") under the 1933
Act.

     

    B.           
The Company has authorized a new series of senior convertible notes of the
Company, which Notes shall be convertible into the Company's common stock, par
value $0.01 per share (the "Common Stock"), in accordance
with the terms of the Notes.

     

    C.           
Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms
and conditions stated in this Agreement, (i) that aggregate principal amount of
Notes, in substantially the form attached hereto as Exhibit A (the "Notes"), set forth opposite
such Buyer's name in column (3) on the Schedule of Buyers (which aggregate
principal amount for all Buyers shall be $5,000,000) (as converted,
collectively, the "Conversion
Shares") and (ii) a warrant, in substantially the form attached hereto as
Exhibit B
(collectively, the "Warrants"), to acquire that
number of shares of Common Stock set forth opposite such Buyer's name in column
(4) on the Schedule of Buyers (as exercised, collectively, the "Warrant Shares").

     

    D.           Contemporaneously
with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement, substantially in the
form attached hereto as Exhibit C (the "Registration Rights
Agreement"), pursuant to which the Company has agreed to provide certain
registration rights with respect to the Conversion Shares and the Warrant Shares
under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws.

     

    E.           
The Notes, Warrants, Warrant Shares and the Conversion Shares, collectively are
referred to herein as the "Securities".

     

    F.           
The Notes will be subordinated to the Senior Indebtedness (as hereinafter
defined), but will rank senior to all other outstanding and future indebtedness
of the Company and its Subsidiaries.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    NOW, THEREFORE, the Company
and each Buyer hereby agree as follows:

     

    
      	
               
      

            	
              1.

            	
              PURCHASE AND SALE OF
      NOTES AND WARRANTS.

            

    

     

    
      	
               
      

            	
              (a)

            	
              Purchase of Notes and
      Warrants.

            

    

     

    (i)          Notes and
Warrants.  Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6 and 7 below, the Company shall issue and sell
to each Buyer, and each Buyer severally, but not jointly, agrees to purchase
from the Company on the Closing Date (as defined below), (A) a principal amount
of Notes as is set forth opposite such Buyer's name in column (3) on the
Schedule of Buyers and (B) a warrant to acquire that number of shares of Common
Stock set forth opposite such Buyer's name in column (4) on the Schedule of
Buyers (the "Closing").

     

    (ii)         Closing.  The
date and time of the Closing (the "Closing Date") shall be 10:00
a.m., New York City time, on the date hereof (or such later date as is mutually
agreed to by the Company and each Buyer) after notification of satisfaction (or
waiver) of the conditions to the Closing set forth in Sections 6 and 7 below at
the offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New
York 10022, subject to notification of satisfaction (or waiver) of the
conditions to the Closing set forth in Sections 6 and 7 below.

     

    (iii)        Purchase
Price.

     

    (1)         The
aggregate purchase price for the Notes and the Warrants to be purchased by each
Buyer at the Closing (the "Purchase Price") shall be the
amount set forth opposite such Buyer's name in column (5) of the Schedule of
Buyers.  Each Buyer shall pay $1.00 for each $1.00 of principal amount
of Notes and related Warrants to be purchased by such Buyer at the
Closing.

     

    (2)         The
Buyers and the Company agree that the Notes and the Warrants constitute an
"investment unit" for purposes of Section 1273(c)(2) of the Internal Revenue
Code of 1986, as amended (the "Code").  The Buyers
and the Company mutually agree that the allocation of the issue price of such
investment unit between the Notes and the Warrants in accordance with Section
1273(c)(2) of the Code and Treasury Regulation Section 1.1273-2(h) shall be an
aggregate amount of $10,000 allocated to the Warrants and the balance of the
Purchase Price allocated to the Notes, and neither the Buyers nor the Company
shall take any position inconsistent with such allocation in any tax return or
in any judicial or administrative proceeding in respect of taxes.

     

    (iv)        Form of
Payment.  On the Closing Date, (i) each Buyer shall pay its
Purchase Price to the Company for the Notes and the Warrants to be issued and
sold to such Buyer at the Closing, by wire transfer of immediately available
funds in accordance with the Company's written wire instructions and
(ii) the Company shall deliver to each Buyer (A) the Notes (in the
principal amounts as such Buyer shall request) which such Buyer is then
purchasing, and (B) the Warrants (in the amounts as such Buyer shall request)
such Buyer is purchasing, in each case duly executed on behalf of the Company
and registered in the name of such Buyer or its designee.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    
      	
               
      

            	
              2.

            	
              BUYER'S
      REPRESENTATIONS AND
WARRANTIES.

            

    

     

    Each
Buyer represents and warrants with respect to only itself that:

     

    (a)           Organization;
Authority.  Such Buyer is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with the requisite power and authority to enter into and to
consummate the transactions contemplated by this Agreement and otherwise to
carry out its obligations hereunder.  The execution, delivery and
performance by such Buyer of the transactions contemplated by this Agreement and
the Registration Rights Agreement have been duly authorized by all necessary
action on the part of such Buyer and no further action is required by such Buyer
or any of its composite entities (such as a board of directors, management
committee, partners or stockholders) in connection herewith.  Each of
this Agreement and the Registration Rights Agreement have been duly executed by
such Buyer, and when delivered by such Buyer in accordance with the terms
hereof, will constitute the valid and legally binding obligation of such Buyer,
enforceable against it in accordance with its terms, except (a) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (b) as enforceability of any
indemnification and contribution provisions may be limited under the federal and
state securities laws and public policy, and (c) that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.

     

    (b)           No Public Sale or
Distribution.  Such Buyer is (i) acquiring the Notes and
Warrants, (ii) upon conversion of the Notes will acquire the Conversion Shares
issuable upon conversion of the Notes and (iii) upon exercise of the Warrants
(other than pursuant to a Cashless Exercise (as defined in the Warrants)) will
acquire the Warrant shares issuable upon exercise of the Warrants, as principal
for its own account and not with a view towards, or for resale in connection
with, the public sale or distribution thereof, except pursuant to sales
registered or exempted under the 1933 Act; provided, however, that by
making the representations herein, such Buyer does not agree to hold any of the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption under applicable federal and state
securities laws.  Such Buyer is acquiring the Securities hereunder in
the ordinary course of its business.  Such Buyer is not a
broker-dealer registered with the SEC under the 34 Act or entity engaged in a
business that would require it to be so registered.  Such Buyer does
not presently have any agreement or understanding, directly or indirectly, with
any Person to distribute any of the Securities.

     

    (c)           Accredited Investor Status;
General Solicitation.  Such Buyer is an "accredited investor"
as that term is defined in Rule 501(a) of Regulation D.  Such Buyer,
either alone or together with its representatives, has such knowledge,
sophistication and experience in business and financial matters so as to be
capable of evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such
investment.  Such Buyer is able to bear the economic risk of an
investment in the Securities and, at the present time, is able to afford a
complete loss of such investment. Such Buyer is not purchasing the Securities as
a result of any advertisement, article, notice or other communication regarding
the Securities published in any newspaper, magazine or similar media or
broadcast over television or radio or presented at any seminar.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (d)           Reliance on
Exemptions.  Such Buyer understands that the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and such
Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.

     

    (e)           Information.  Such
Buyer and its advisors, if any, have been furnished with or has otherwise had
access to all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities which
have been requested by such Buyer.  Such Buyer and its advisors, if
any, have been afforded the opportunity to ask questions of the
Company.  Neither such inquiries nor any other due diligence
investigations conducted by such Buyer or its advisors, if any, or its
representatives shall modify, amend or affect such Buyer's right to rely on the
Company's representations and warranties contained herein.  Such Buyer
understands that its investment in the Securities involves a high degree of
risk.  Such Buyer has sought such accounting, legal and tax advice as
it has considered necessary to make an informed investment decision with respect
to its acquisition of the Securities.

     

    (f)           
No Governmental
Review.  Such Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities nor have such authorities passed
upon or endorsed the merits of the offering of the Securities.

     

    (g)           Transfer or
Resale.  Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) such Buyer
provides the Company with reasonable assurance that such Securities can be sold,
assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the
1933 Act, as amended (or a successor rule thereto) (collectively, "Rule 144"); (ii) any sale of
the Securities made in reliance on Rule 144 may be made only in accordance with
the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of
the Securities under circumstances in which the seller (or the Person (as
defined in Section 3(e)) through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder; and (iii) neither the Company nor any other Person is under any
obligation to register the Securities under the 1933 Act or any state securities
laws or to comply with the terms and conditions of any exemption
thereunder.

     

    (h)           Legends.  Such
Buyer understands that the certificates or other instruments representing the
Notes and the Warrants and, until such time as the resale of the Conversion
Shares and the Warrant Shares have been registered under the 1933 Act as
contemplated by the Registration Rights Agreement, the stock certificates
representing the Conversion Shares and the Warrant Shares, except as set forth
below, shall bear any legend as required by the "blue sky" laws of any state and
a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock
certificates):

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    [NEITHER THE ISSUANCE AND SALE
OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH
THESE SECURITIES ARE CONVERTIBLE [EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED
BY THIS CERTIFICATE HAVE NOT 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, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.

     

    The
legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped or issue to such holder by electronic delivery at the applicable balance
account at DTC, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act and are thereafter sold
in compliance with said Act, (ii) in connection with a sale, assignment or other
transfer, such holder provides the Company with an opinion of counsel, in a
generally acceptable form, to the effect that such sale, assignment or transfer
of the Securities may be made without registration under the applicable
requirements of the 1933 Act and that such legend may be removed, or (iii) such
holder provides the Company with reasonable assurance, reasonably acceptable to
the Company's registrar and transfer agent, that the Securities can be sold,
assigned or transferred pursuant to Rule 144 or Rule 144A.

     

    (i)           
No
Conflicts.  The execution, delivery and performance by such
Buyer of this Agreement and the Registration Rights Agreement and the
consummation by such Buyer of the transactions contemplated hereby and thereby
do not and will not (i) conflict with or violate the organizational documents of
such Buyer or (ii) except as set forth on Schedule 3(d), conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party, or (iii) result in a violation of any
law, rule, regulation, order, judgment  or decree (including federal
and state securities laws) applicable to such Buyer, except in the case of
clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations
which would not, individually or in the aggregate, reasonably be expected to
have a material adverse effect on the ability of such Buyer to perform its
obligations hereunder.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (j)           
Residency.  Such
Buyer is a resident of that jurisdiction specified below its address on the
Schedule of Buyers.

     

    (k)           Agent
Fees.  That no fees, commissions, or other payments are or will
be payable to any broker, finder, placement agent, or intermediary acting on
behalf of such Buyer for actions relating to or arising out of the transactions
contemplated by this Agreement, including, without limitation, any fees or
commissions payable to such Buyer's agents.

     

    (l)           
Certain Trading
Activities.  Neither such Buyer nor its affiliates has directly
or indirectly engaged in any Short Sales involving the Company's securities
since the time that such Buyer was first contacted by the Company with respect
to the transactions contemplated hereby.  "Short Sales" include, without
limitation, all "short sales" as defined in Rule 200 promulgated under
Regulation SHO under the 1934 Act and all types of direct and indirect stock
pledges, forward sale contracts, options, puts, calls, short sales, swaps and
similar arrangements (including on a total return basis), and sales and other
transactions through non-US broker dealers or foreign regulated
brokers.  Notwithstanding the foregoing, in the case of a Buyer that
is or is part of a multi-managed investment vehicle (a "Fund") whereby separate
portfolio managers manage separate portions of such Fund's assets and the
portfolio managers have no direct knowledge of the investment decisions made by
the portfolio managers managing other portions of such Fund's assets, the
representation set forth above shall solely apply with respect to the portion of
assets of such Buyer or its affiliates, as applicable, managed by the portfolio
manager that made the investment decision to purchase the Securities covered by
this Agreement.  Such Buyer hereby covenants and agrees not to, and
shall cause its affiliates not to, engage, directly or indirectly, in any
transactions in the securities of the Company or involving the Company's
securities during the period from the date hereof until such time as (i) the
transactions contemplated by this Agreement are first publicly announced as
described in Section 4(h)  hereof or (ii) this Agreement is terminated
in full pursuant to Section 8 hereof.  Notwithstanding the foregoing,
for avoidance of doubt, nothing contained herein shall constitute a
representation or warranty, or preclude any actions, with respect to the
identification of the availability of, or securing of, available shares to
borrow in order to effect short sales or similar transactions in the
future.

     

    The
Company acknowledges and agrees that each Buyer does not make or has not made
any representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.

     

    
      	
               
      

            	
              3.

            	
              REPRESENTATIONS AND
      WARRANTIES OF THE COMPANY.

            

    

     

    The
Company hereby makes the following representations and warranties to each
Buyer:

     

    (a)           Subsidiaries.  There
is no entity in which the Company, directly or indirectly, owns capital stock or
holds an equity or similar interest other than those listed in Schedule 3(a) ("Subsidiaries").  Except
as disclosed in Schedule 3(a), the
Company owns, directly or indirectly, all of the capital stock of each
Subsidiary free and clear of any and all liens, charges, encumbrances, security
interests, rights of first refusal or other restrictions of any kind ("Liens"), and all the issued
and outstanding shares of capital stock of each Subsidiary are validly issued
and are fully paid, non-assessable and free of preemptive and similar
rights.  As of the Closing Date, none of Arotech Security Corp., a
Delaware corporation, I.E.S. Defense Services, Inc., a Delaware corporation,
Summit Training International, Inc., a Delaware corporation and Electric Fuel
Transportation Corp., a Delaware corporation (each an "Inactive Subsidiary") owns or
possesses any material property or assets.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (b)           Organization and
Qualification.  Except as set forth on Schedule 3(b) hereto,
(1) each of the Company and each Subsidiary is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted, (2) neither the Company nor any Subsidiary is in
violation of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents, and (3) each
of the Company and each Subsidiary is duly qualified to conduct business and is
in good standing as a foreign corporation or other entity in each jurisdiction
in which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, have
or reasonably be expected to result in (i) an adverse effect on the legality,
validity or enforceability of any Transaction Document (as hereinafter defined),
(ii) a material and adverse effect on the results of operations, assets,
business or financial condition of the Company and the Subsidiaries, taken as a
whole, or (iii) an adverse impairment to the Company's ability to perform on a
timely basis its obligations under any Transaction Document (any of (i), (ii) or
(iii), a "Material Adverse
Effect").

     

    (c)           Authorization;
Enforcement.  The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each
of this Agreement, the Notes, the Warrants, the Registration Rights Agreement,
the Irrevocable Transfer Agent Instructions (as defined in Section 5(b)), the
Lock-Up Agreements (as defined below) and any other documents or agreements
executed in connection with the transactions contemplated hereunder
(collectively, the "Transaction
Documents") and otherwise to carry out its obligations hereunder and
thereunder and to issue the Securities in accordance with the terms hereof and
thereof.  The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated hereby and thereby, including, without limitation, the issuance of
the Notes and Warrants, the reservation for issuance and the issuance of the
Conversion Shares issuable upon conversion
of the Notes and the Warrant Shares issuable upon exercise of the Warrants, have
been duly authorized by all necessary action on the part of the Company and no
further action is required by the Company, its Board of Directors or its
stockholders in connection herewith and therewith (other than (i) the filing
with the SEC of one or more Registration Statements in accordance with the
requirements of the Registration Rights Agreement), (ii) the Company obtaining
Stockholder Approval (as hereinafter defined) and (iii) filings that have been
made pursuant to applicable state securities laws and post-sale filings pursuant
to applicable state and federal securities laws and/or any other notices
required thereby and (iv) the filing of an application with the Principal Market
(as hereinafter defined) for the inclusion of the Conversion Shares and the
Warrant Shares for trading on the Principal Market with respect to the offering
contemplated by the Transaction Documents.  Each Transaction Document
has been (or upon delivery will have been) duly executed by the Company and,
when delivered in accordance with the terms hereof, will constitute the valid
and binding obligation of the Company enforceable against the Company in
accordance with its terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification and contribution
provisions may be limited under the federal and state securities laws and public
policy, and (c) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (d)           No
Conflicts.  The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby including, without limitation, the
issuance of the Notes and the Warrants reservation for issuance and issuance of
the Conversion Shares and the Warrant Shares) do not and will not (i) conflict
with or violate any provision of the Company's or any Subsidiary's certificate
or articles of incorporation, any certificate of designations, preferences and
rights of any outstanding series of preferred stock, bylaws or other
organizational or charter documents, or (ii) conflict with, or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both) of,
any agreement, credit facility, debt or other instrument (evidencing a Company
or Subsidiary debt or otherwise) or other understanding to which the Company or
any Subsidiary is a party or by which any property or asset of the Company or
any Subsidiary is bound or affected, or (iii) subject to the Company obtaining
Stockholder Approval, result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company or a Subsidiary is subject (including federal and
state securities laws and regulations of whichever of the New York Stock
Exchange, Inc., the American Stock Exchange, The NASDAQ Global Market (the
"Principal Market") or
The NASDAQ Global Select Market, The NASDAQ Capital Market or the OTC Bulletin
Board that the Common Stock is listed or quoted for trading on the date in
question (any of the foregoing, a "Trading Market"), or by which
any property or asset of the Company or a Subsidiary is bound or affected;
except in the case of each of clauses (ii) and (iii), such as could not,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect.

     

    (e)           Filings, Consents and
Approvals.  Neither the Company nor any Subsidiary is required
to obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration (collectively, "Consents") with, any court or
other federal, state, local or other governmental authority or any regulatory or
self-regulatory agency or other  individual or corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind (a "Person") in connection with
the execution, delivery and performance by the Company of the Transaction
Documents other than (i) filing a Current Report on Form 8-K with the SEC, (ii)
filing with the SEC of one ore more registration statements in accordance with
the Registration Rights Agreement, (iii) filing applications for the listing of
additional shares with the Principal Market, (iv) obtaining those Consents set
forth in Schedule
3(e), which Consents have been obtained on or prior to the date hereof;
(v) the Stockholder Approval (as defined below) and (vi) filings that have been
or will be made pursuant to applicable state securities laws and post-sale
filings pursuant to applicable state and federal securities laws and/or any
other notices required thereby.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (f)          
 Issuance of
Securities.  The issuance of the Notes have been duly
authorized and, upon issuance in accordance with the terms hereof and payment
therefor, will be duly and validly issued, fully paid and nonassessable, free
from all taxes, Liens and charges with respect to the issue
thereof.  As of the Closing, the Company shall have reserved from its
duly authorized capital stock not less than 130% of the sum of (i) of the
maximum number of shares of Common Stock issuable upon conversion of the Notes
issuable at the Closing (assuming for purposes hereof, that the Notes are
convertible at the initial Conversion Price and without taking into account any
limitations on the conversion of the Notes set forth in the Notes) and (ii) the
maximum number of shares of common Stock issuable upon exercise of the
Warrants.  Upon conversion in accordance with the Notes, the
Conversion Shares, and upon exercise and payment in accordance with the
Warrants, the Warrant Shares will be validly issued, fully paid and
nonassessable and free from all preemptive or similar rights, taxes, Liens and
charges with respect to the issue thereof, with the holders being entitled to
all rights accorded to a holder of Common Stock.  Assuming the
accuracy of the representations and warranties contained in Sections 2(b)
through 2(f), inclusive, above as they relate to all of the Buyers in the
aggregate, the offer and issuance by the Company of the Securities is exempt
from registration under the 1933 Act.

     

    (g)           Capitalization.  The
number of shares and type of all authorized, issued and outstanding capital
stock of the Company is set forth in Schedule
3(g).  Except as set forth in Schedule 3(g), no
securities of the Company are entitled to preemptive or similar rights, and no
Person has any right of first refusal, preemptive right, right of participation,
or any similar right to participate in the transactions contemplated by the
Transaction Documents.  Except as a result of the purchase and sale of
the Securities and except as disclosed in Schedule 3(g), there
are no outstanding options, warrants, scrip rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exchangeable for, or giving any Person any right
to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock, or
securities or rights convertible or exchangeable into shares of Common
Stock.  Except as set forth in Schedule 3(g), the
issue and sale of the Securities will not, immediately or with the passage of
time, obligate the Company to issue shares of Common Stock or other securities
to any Person (other than the Buyers) and will not result in a right of any
holder of Company securities to adjust the exercise, conversion, exchange or
reset price under such securities.  The Company has furnished or made
available to the Buyer true, correct and complete copies of the Company's
Certificate of Incorporation, as amended and as in effect on the date hereof
(the "Certificate of
Incorporation"), and the Company's Bylaws, as amended and as in effect on
the date hereof (the "Bylaws").

     

    (h)           SEC Reports; Financial
Statements.  The Company has filed all reports permitted or
required to be filed by it under the 1933 Act and the Securities Exchange Act of
1934, as amended (the "1934
Act"), including pursuant to Section 13(a) or 15(d) thereof, for the two
years preceding the date hereof (or such shorter period as the Company was
required by law to file such reports) (the foregoing materials, including any
amendments thereto filed with the SEC prior to the date hereof, being
collectively referred to herein as the "SEC Reports" and, together
with the Schedules to this Agreement, the "Disclosure Materials") on a
timely basis or has received a valid extension of such time of filing and has
filed any such SEC Reports prior to the expiration of any such
extension.  The Company has delivered to the Buyers a copy of all SEC
Reports not available on the EDGAR system.  Except as set forth on
Schedule 3(h),
as of their respective dates, the SEC Reports complied in all material respects
with the requirements of the 1933 Act and the 1934 Act applicable thereto and
the rules and regulations of the SEC promulgated thereunder, and none of the SEC
Reports, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.  Except as set forth in Schedule 3(h), the
Company is in material compliance with the Sarbanes-Oxley Act of 2002, and the
rules and regulations promulgated thereunder by all government and regulatory
authorities and agencies.  The financial statements of the Company
included in the SEC Reports comply in all material respects with applicable
accounting requirements and the rules and regulations of the SEC with respect
thereto as in effect at the time of filing.  Such financial statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved ("GAAP"), except as may be
otherwise specified in such financial statements or the notes thereto, and
fairly present in all material respects the financial position of the Company
and its consolidated Subsidiaries as of and for the dates thereof and the
results of operations and cash flows for the periods then ended, subject, in the
case of unaudited statements, to normal, immaterial, year-end audit
adjustments.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (i)           
Material
Changes.  Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically disclosed in
the SEC Reports and except as set forth on Schedule 3(i)
hereto,(i) there has been no event, occurrence or development that has had or
that could reasonably be expected to result in a Material Adverse Effect, (ii)
the Company has not incurred any liabilities (contingent or otherwise) other
than (A) trade payables and accrued expenses incurred in the ordinary course of
business consistent with past practice and (B) liabilities not required to be
reflected in the Company's financial statements pursuant to GAAP or required to
be disclosed in filings made with the SEC, (iii) the Company has not altered its
method of accounting or the identity of its auditors, (iv) the Company has not
declared or made any dividend or distribution of cash or other property to its
stockholders or purchased, redeemed or made any agreements to purchase or redeem
any shares of its capital stock, (v) the Company has not issued any equity
securities to any officer, director or any Person that, directly or indirectly
through one or more intermediaries, controls or is controlled by or is under
common control with a Person, as such terms are used in and construed under Rule
144 promulgated under the 1933 Act, as amended (or a successor rule thereto)
("Rule 144") (an "Affiliate"), except pursuant
to existing stock option plans of the Company, (vi) the Company has not sold any
assets, individually or in the aggregate, in excess of $250,000 outside of the
ordinary course of business or (vii) the Company has not had capital
expenditures, individually or in the aggregate, in excess of
$250,000.  The Company does not have pending before the SEC any
request for confidential treatment of information.

     

    (j)           
Litigation.  Except
as set forth in the SEC Reports, there is no action, suit, proceeding, inquiry
or investigation which (i) adversely affects or challenges the legality,
validity or enforceability of any of the Transaction Documents or the Securities
or (ii) could, if there were an unfavorable decision, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect.  Neither the Company nor any Subsidiary, nor any director or
officer thereof, is or has been the subject of any claim, action or proceeding
involving a claim of violation of or liability under federal or state securities
laws or a claim of breach of fiduciary duty.  There has not been, and
to the knowledge of the Company, there is not pending or contemplated, any
investigation by the SEC involving the Company or any current or former director
or officer of the Company.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (k)           Labor
Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company.

     

    (l)          
 Compliance.  Except
as set forth in Schedule 3(l),
neither the Company nor any Subsidiary (i) is in default under or in violation
of (and no event has occurred that has not been waived that, with notice or
lapse of time or both, would result in a default by the Company or any
Subsidiary under), nor has the Company or any Subsidiary received notice of a
claim that it is in default under or that it is in violation of, any indenture,
loan or credit agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound (whether or not such
default or violation has been waived), (ii) is in violation of any order of any
court, arbitrator, governmental body, or regulatory or self-regulatory authority
or (iii) is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal, state
and local laws relating to taxes, environmental protection, occupational health
and safety, product quality and safety and employment and labor matters, except
in each case as could not, individually or in the aggregate, have or reasonably
be expected to result in a Material Adverse Effect.

     

    (m)           Regulatory
Permits.  The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits would not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect ("Material Permits"), and
neither the Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any Material Permit.

     

    (n)           Title to
Assets.  The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them that is
material to their respective businesses and good and marketable title in all
personal property owned by them that is material to their respective businesses,
in each case free and clear of all Liens, except as set forth in Schedule 3(n) and
except for Liens as do not materially affect the value of such property and do
not materially interfere with the use made and proposed to be made of such
property by the Company and the Subsidiaries. Any real property and facilities
held under lease by the Company and the Subsidiaries are held by them under
valid, subsisting and enforceable leases of which the Company and the
Subsidiaries are in compliance in all material respects.

     

    (o)           Patents and
Trademarks.  The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and other similar
rights that are necessary or material for use in connection with their
respective businesses as described in the SEC Reports and which the failure to
so have could, individually or in the aggregate, have or reasonably be expected
to result in a Material Adverse Effect (collectively, the "Intellectual Property
Rights").  The Company does not have any knowledge of any
infringement by the Company or its Subsidiaries of Intellectual Property Rights
of others.  There is no claim, action or proceeding being made or
brought, or to the knowledge of the Company, being threatened, against the
Company or its Subsidiaries regarding its Intellectual Property
Rights.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (p)           Insurance.  The
Company and the Subsidiaries are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which the Company and the Subsidiaries are
engaged.  The Company has no reason to believe that it or its
Subsidiaries will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business without a significant increase in
cost, other than anticipated increases in the market price of officers' and
directors' liability insurance generally.

     

    (q)           Foreign Corrupt
Practices.  Neither the Company nor any direct director,
officer or employee acting on behalf of the Company or any of its Subsidiaries
has, in the course of its actions for, or on behalf of, the Company (i) used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; (ii) made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; (iii) violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv)
made any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or
employee.

     

    (r)           Transactions With Affiliates
and Employees.  Except as set forth in the SEC Reports on Schedule 3(r), none
of the officers or directors of the Company and, to the knowledge of the
Company, none of the employees of the Company is presently a party to any
transaction with the Company or any Subsidiary (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Company, any entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or
partner.

     

    (s)           Tax
Status.  The Company and each of its Subsidiaries (i) has made
or filed all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject, (ii) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith and (iii) has set aside on its books
provision reasonably adequate for the payment of all material taxes for periods
subsequent to the periods to which such returns, reports or declarations
apply.  There are no unpaid taxes in any material amount claimed to be
due by the taxing authority of any jurisdiction, and the officers of the Company
know of no basis for any such claim.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (t)          
 Internal
Accounting Controls.  Except as set forth on Schedule 3(t), the
Company and the Subsidiaries maintain a system of internal accounting controls
which the audit committee of the board of directors reasonably believes is
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

     

    (u)           Solvency.  Based
on the financial condition of the Company as of the  date hereof and
as of the Closing Date, (i) the Company's fair saleable value of its assets
exceeds the amount that will be required to be paid on or in respect of the
Company's existing debts and other liabilities (including known contingent
liabilities) as they mature; (ii) the Company's assets do not constitute
unreasonably small capital to carry on its business for the current fiscal year
as now conducted and as proposed to be conducted including its capital needs
taking into account the particular capital requirements of the business
conducted by the Company, and projected capital requirements and capital
availability thereof; and (iii) the current cash flow of the Company, together
with the proceeds the Company would receive, were it to liquidate all of its
assets, after taking into account all anticipated uses of the cash, would be
sufficient to pay all amounts on or in respect of its debt when such amounts are
required to be paid.  The Company does not intend to incur debts
beyond its ability to pay such debts as they mature (taking into account the
timing and amounts of cash to be payable on or in respect of its
debt).

     

    
      	
               
      

            	
              (v)

            	
              Reserved.

            

    

     

    (w)           Application of Takeover
Protections; Rights Agreement.  The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or the laws of
the jurisdiction of its formation which is or could become applicable to any
Buyer as a result of the transactions contemplated by this Agreement, including,
without limitation, the Company's issuance of the Securities and any Buyer's
ownership of the Securities.  The Company has not adopted a
stockholder rights plan or similar arrangement relating to accumulations of
beneficial ownership of Common Stock or a change in control of the
Company.

     

    (x)           No General Solicitation;
Placement Agent's Fees.  Neither the Company, nor any of its
affiliates, nor any Person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D) in connection with the offer or sale of the
Securities.  The Company shall be responsible for the payment of any
placement agent's fees, financial advisory or consultancy fees, brokers'
commissions or finder's fee (other than for persons engaged by any Buyer or its
investment advisor) relating to or arising out of the transactions contemplated
hereby, which fees shall not exceed 2% of the aggregate Purchase Price and 50%
of which shall be allocated to charity.  The Company shall pay, and
hold each Buyer harmless against, any liability, loss or expense (including,
without limitation, attorney's fees and out-of-pocket expenses) arising in
connection with any such claim; provided, that the Company shall not be
responsible for the payment of any amounts under this Agreement resulting from a
breach of the representation by any Buyer set forth in Section
2(k).  The Company acknowledges that it has engaged Olympus
Securities, LLC, as placement agent (the "Agent") in connection with the
sale of the Securities.  Other than the Agent, neither the Company nor
any of its Subsidiaries has engaged any placement agent or other agent in
connection with the sale of the Securities.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (y)           No Integrated
Offering.  None of the Company, its Subsidiaries, any of their
Affiliates, and any Person acting on their behalf has, directly or indirectly,
made any offers or sales of any security or solicited any offers to buy any
security, under circumstances that would cause this offering of the Securities
to be integrated with prior offerings by the Company for purposes of any
applicable stockholder approval provisions, including, without limitation, under
the rules and regulations of any exchange or automated quotation system on which
any of the securities of the Company are listed or designated.  None
of the Company, its Subsidiaries, their Affiliates and any Person acting on
their behalf will take any action or steps referred to in the preceding sentence
that would cause the offering of the Securities to be integrated with other
offerings.

     

    (z)           
Ranking of
Notes.  Except as set forth on Schedule 3(z) (the
"Senior Indebtedness"),
no Indebtedness of the Company is senior to or ranks pari passu with the Notes in
right of payment, whether with respect of payment of redemptions, interest,
damages or upon liquidation or dissolution or otherwise.

     

    (aa)          Certain Registration
Matters.  The Company is eligible to register the sale of its
Common Stock under Form S-3 promulgated under the 1933 Act.  Except as
described in Schedule
3(aa) and securities that have been previously registered for resale by
the Company, the Company has not granted or agreed to grant to any Person any
rights (including "piggy-back" registration rights) to have any securities of
the Company registered with the SEC or any other governmental authority that
have not been satisfied.

     

    (bb)          Listing and Maintenance
Requirements.  Except as set forth in the SEC Reports, or as
set forth in Schedule
3(bb), the Company has not, in the two years preceding the date hereof,
received notice (written or oral) from any Trading Market on which the Common
Stock is or has been listed or quoted to the effect that the Company is not in
compliance with the listing or maintenance requirements of such Trading
Market.  The Company is currently in compliance with all such listing
and maintenance requirements. Subject to obtaining the Stockholder Approval to
the extent required by the Principal Market, the issuance and sale of the
Securities hereunder does not contravene the rules and regulations of the
Principal Market and no approval of the stockholders of the Company is required
for the Company to issue and deliver to the Buyers up to 130% of the sum of (i)
the maximum number of shares of Common Stock issuable upon conversion of the
Notes issuable at the Closing (assuming for purposes hereof, that the Notes are
convertible at the initial Conversion Price (including any shares issuable as
amortization payments) and without taking into account any limitations on the
conversion of the Notes set forth in the Notes) and (ii) the maximum number of
shares of Common Stock issuable upon exercise of the Warrants.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (cc)          Investment
Company.  The Company is not, and is not an Affiliate of, an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.

     

    (dd)         Bank Holding
Company.  Neither the Company nor any of its Subsidiaries or
Affiliates is subject to the Bank Holding Company Act of 1956, as amended (the
"BHCA") and to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve").  Neither the Company nor any of its Subsidiaries or
Affiliates owns or controls, directly or indirectly, five percent or more of the
outstanding shares of any class of voting securities or twenty-five percent or
more of the total equity of a bank or any entity that is subject to the BHCA and
to regulation by the Federal Reserve.  Neither the Company nor any of
its Subsidiaries or Affiliates exercises a controlling influence over the
management or policies of a bank or any entity that is subject to the BHCA and
to regulation by the Federal Reserve.

     

    (ee)          U.S. Real Property Holding
Corporation.  The Company is not, nor has ever been, a U.S.
real property holding corporation within the meaning of Section 897 of the
Internal Revenue Code of 1986, as amended, and the Company shall so certify upon
Buyer's request.

     

    (ff)           Shell Company Status.
The Company is not, and has never been, an issuer identified in Rule
144(i)(1).

     

    (gg)         Manipulation of
Price.  The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to
cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) other than the Agent, sold, bid for, purchased, or paid any
compensation for soliciting purchases of, any of the Securities, or (iii) other
than the Agent, paid or agreed to pay to any person any compensation for
soliciting another to purchase the Securities.

     

    (hh)          Transfer
Taxes.  On the Closing Date, all stock transfer or other taxes
(other than income or similar taxes) which are required to be paid in connection
with the sale and transfer of the Securities to be sold to each Buyer hereunder
will be, or will have been, fully paid or provided for by the Company, and all
laws imposing such taxes will be or will have been complied with.

     

    (ii)           
OFAC.  Neither
the Company nor, to the knowledge of the Company, any director, officer, agent,
employee or affiliate of the Company is currently subject to any U.S. sanctions
administered by the Office of Foreign Assets Control of the U.S. Treasury
Department ("OFAC"); and
the Company will not, directly or indirectly, use the proceeds of the offering,
or lend, contribute or otherwise make available such proceeds to any Subsidiary,
joint venture partner or other Person, for the purpose of financing the
activities of any person currently subject to any U.S. sanctions administered by
OFAC.

     

    (jj)           Disclosure.  Other
than information regarding the offering contemplated by the Transaction
Documents, the Company confirms that neither it nor any other Person acting on
its behalf has provided any of the Buyers or their agents or counsel with any
information that constitutes material, nonpublic information.  The
Company understands and confirms that each of the Buyers will rely on the
foregoing representations in effecting transactions in securities of the
Company.  All disclosure provided to the Buyers regarding the Company,
its business and the transactions contemplated hereby, furnished by or on behalf
of the Company, including the Schedules to this Agreement, is true and correct
in all material respects and does not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, in all material respects not misleading.  No event or
circumstance has occurred or information exists with respect to the Company or
any of its Subsidiaries or its or their business, properties, operations or
financial conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (kk)           Acknowledgment Regarding
Buyer's Purchase of Securities.  The Company acknowledges and
agrees that each Buyer is acting solely in the capacity of arm's length
purchaser with respect to the Transaction Documents and the transactions
contemplated hereby and thereby, and that no Buyer is an officer or director of
the Company.  The Company further acknowledges that no Buyer is acting
as a financial advisor or fiduciary of the Company (or in any similar capacity)
with respect to the Transaction Documents and the transactions contemplated
hereby and thereby, and any advice given by a Buyer or any of its
representatives or agents in connection with the Transaction Documents and the
transactions contemplated hereby and thereby is merely incidental to such
Buyer's purchase of the Securities.  The Company further represents to
each Buyer that the Company's decision to enter into the Transaction Documents
has been based solely on the independent evaluation by the Company and its
representatives.

     

    
      	
               
      

            	
              4.

            	
              COVENANTS.

            

    

     

    (a)           Reasonable Best
Efforts.  Each party shall use its reasonable best efforts
timely to satisfy each of the covenants and the conditions to be satisfied by it
as provided in this Section 4 and Sections 6 and 7 of this
Agreement.

     

    (b)           Form D and Blue
Sky.  The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing.  The Company shall, on or before the
Closing Date, take such action as the Company shall reasonably determine is
necessary in order to obtain an exemption for or to qualify the Securities for
sale to the Buyers at the Closing pursuant to this Agreement under applicable
securities or "Blue Sky" laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to the Buyers on or prior to the Closing Date.  The
Company shall make all filings and reports relating to the offer and sale of the
Securities required under applicable securities or "Blue Sky" laws of the states
of the United States following the Closing Date.

     

    (c)           Reporting
Status.  Until the date on which the Investors (as defined in
the Registration Rights Agreement) shall have sold all the Conversion Shares and
Warrant Shares and
none of the Notes or Warrants is
outstanding (the "Reporting
Period"), the Company shall file all reports required to be filed with
the SEC pursuant to the 1934 Act, and the Company shall not terminate its status
as an issuer required to file reports under the 1934 Act even if the 1934 Act or
the rules and regulations thereunder would otherwise permit such
termination.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (d)           Financial
Information.  The Company agrees to send the following to each
Investor (as defined in the Registration Rights Agreement) during the Reporting
Period (i) unless the following are filed with the SEC through EDGAR and are
available to the public through the EDGAR system, within one (1) Business Day
after the filing thereof with the SEC, a copy of its Annual Reports on Form
10-K, any interim reports or any consolidated balance sheets, income statements,
stockholders' equity statements and/or cash flow statements for any period other
than annual, any Current Reports on Form 8-K and any registration statements
(other than on Form S-8) or amendments filed pursuant to the 1933 Act, (ii) on
the same day as the release thereof, facsimile or e-mailed copies of all
material financial press releases issued by the Company, and (iii) unless the
following are filed with the SEC through EDGAR and are available to the public
through the EDGAR system, copies of any notices and other information made
available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the
stockholders.

     

    (e)           Listing.  The
Company shall, when and as required under the Registration Rights Agreement,
secure the listing of all of the Registrable Securities (as defined in the
Registration Rights Agreement) upon each national securities exchange and
automated quotation system, if any, upon which the Common Stock is then listed
(subject to official notice of issuance) and shall maintain such listing of all
Registrable Securities from time to time issuable under the terms of the
Transaction Documents.  The Company shall maintain the Common Stock's
authorization for listing on a Trading Market.  Neither the Company
nor any of its Subsidiaries shall take any action which would be reasonably
expected to result in the delisting or suspension of the Common Stock on all
Trading Markets.  The Company shall pay all fees and expenses in
connection with satisfying its obligations under this Section 4(e).

     

    (f)           Fees.  At
the Closing, the Company shall reimburse Highbridge International LLC (a Buyer)
or its designee(s) for all actual reasonable out-of-pocket, third party costs
and expenses incurred in connection with the transactions contemplated by the
Transaction Documents (including all reasonable legal fees and disbursements in
connection therewith, documentation and implementation of the transactions
contemplated by the Transaction Documents and due diligence in connection
therewith), which amount shall be withheld by such Buyer from its aggregate
Purchase Price at the Closing. The Company shall be responsible for the payment
of any placement agent's fees, financial advisory fees, or broker's commissions
(other than for Persons engaged by any Buyer) relating to or arising out of the
transactions contemplated hereby, including, without limitation, any fees or
commissions payable to the Agent.  The Company shall pay, and hold
each Buyer harmless against, any liability, loss or expense (including, without
limitation, reasonable attorney's fees and out-of-pocket expenses) arising in
connection with any claim relating to any such payment.  Except as
otherwise set forth in this Agreement or in the Transaction Documents, each
party to this Agreement shall bear its own expenses in connection with the sale
of the Securities to the Buyers; provided, that the Company shall not be
responsible for the payment of any amounts under this Agreement resulting from a
breach of the representation by any Buyer as set forth in Section
2(k).

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (g)           Pledge of
Securities.  The Company acknowledges and agrees that the
Securities may, to the extent permitted by the 1933 Act, be pledged by an
Investor (as defined in the Registration Rights Agreement) in connection with a
bona fide margin agreement or other loan or financing arrangement that is
secured by the Securities.  The pledge of Securities shall not be
deemed to be a transfer, sale or assignment of the Securities hereunder, and no
Investor effecting a pledge of Securities shall be required to provide the
Company with any notice thereof or otherwise make any delivery to the Company
pursuant to this Agreement or any other Transaction Document, including, without
limitation, Section 2(h) hereof; provided that an Investor and its pledgee shall
be required to comply with the provisions of Section 2(h) hereof in order to
effect a sale, transfer or assignment of Securities to such
pledgee.  The Company hereby agrees to execute and deliver such
documentation as a pledgee of the Securities may reasonably request in
connection with a pledge of the Securities to such pledgee by an
Investor.

     

    (h)           Disclosure of Transactions
and Other Material Information.  The Company shall, on or
before 8:30 a.m., New York City time, on the first Business Day following
the execution and delivery of this Agreement, file a Current Report on Form 8-K
describing the terms of the transactions contemplated by the Transaction
Documents in the form required by the 1934 Act, and attaching the material
Transaction Documents (including, without limitation, this Agreement, the form
of each of the Notes, the Warrants and the Registration Rights Agreement) as
exhibits to such filing (including all attachments, the "8-K Filing").  From
and after the filing of the 8-K Filing, no Buyer shall be in possession of any
material, nonpublic information provided to them by the Company, any of its
Subsidiaries or any of its respective officers, directors, employees or agents,
that is not disclosed in such 8-K Filing.  The Company shall not, and
shall cause each of its Subsidiaries and its and each of their respective
officers, directors, employees and agents, not to, provide any Buyer with any
material nonpublic information regarding the Company or any of its Subsidiaries
from and after the filing of the press release referred to in the first sentence
of this Section without the express written consent of such
Buyer.  Subject to the foregoing, neither the Company nor any Buyer
shall issue any press releases or any other public statements with respect to
the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Buyer, to make any
press release or other public disclosure with respect to such transactions (i)
in substantial conformity with the 8-K Filing and contemporaneously therewith
and (ii) as is required by applicable law and regulations, including the
applicable rules and regulations of the Principal Market (provided that in the
case of clause (i) each Buyer shall be consulted by the Company in connection
with any such press release or other public disclosure prior to its
release).  Except as otherwise required by law, without the prior
written consent of any applicable Buyer (which consent shall not be unreasonably
withheld), the Company shall not disclose the name of any Buyer in any filing,
announcement, release or otherwise.

     

    (i)           Use of
Proceeds.  The Company will use the proceeds from the sale of
the Securities to make a loan to DEI Services Corporation ("DEI") in the form of the
$2,500,000 10% Senior Subordinated Convertible Note, in the form attached hereto
as Exhibit I,
issued by DEI to FAAC Incorporated, a wholly-owned Subsidiary of the Company,
with any remaining proceeds used for general corporate and working capital
purposes other than the (A) repayment of any other outstanding Indebtedness of
the Company or its Subsidiaries prior to the final due date thereof or (B)
redemption or repurchase of any of its or its Subsidiaries' equity or
equity-linked Securities.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (j)         
  Restriction on Redemption
and Cash Dividends.  So long as any Notes are outstanding,
without the prior express written consent of the holders of Notes representing
not less than a majority of the aggregate principal amount of the then
outstanding Notes, the Company shall not, directly or indirectly, redeem, or
declare or pay any cash dividend or distribution on, the Common
Stock.

     

    (k)           Additional Notes; Variable
Securities; Dilutive Issuances.  So long as any Notes remain
outstanding, the Company will not issue any Notes (other than to the Buyers as
contemplated hereby) and the Company shall not issue any other securities that
would cause a breach or default under the Notes.  For long as any
Notes remain outstanding, the Company shall not, in any manner, issue or sell
any rights, warrants or options to subscribe for or purchase Common Stock or
directly or indirectly convertible into or exchangeable or exercisable for
Common Stock at a price which varies or may vary, from time to time, with the
market price of the Common Stock, including by way of one or more reset(s) to
any fixed price unless the conversion, exchange or exercise price of any such
security cannot be less than the then applicable Conversion Price (as defined in
the Notes) with respect to the Common Stock into which any Note is convertible
or the then applicable Exercise Price (as defined in the Warrants) with respect
to the Common Stock into which any Warrant is exercisable.  Until the
Stockholder Approval has been obtained, the Company shall not, in any manner,
enter into or affect any Dilutive Issuance (as defined in the Notes) and,
thereafter, for long as any Notes or Warrants remain outstanding, the Company
shall not, in any manner, enter into or affect any Dilutive Issuance (as defined
in the Notes) if the effect of such Dilutive Issuance is to cause the Company to
be required to issue upon conversion of any Note any shares of Common Stock or
exercise of any Warrant any shares of Common Stock in excess of that number of
shares of Common Stock which the Company may issue upon conversion of the Notes
or exercise of the Warrants without breaching the Company's obligations under
the rules or regulations of the Eligible Market (as defined in the
Notes).

     

    (l)           
Corporate
Existence.  So long as any Notes remain outstanding, the
Company shall not be party to any Fundamental Transaction (as defined in the
Notes) unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Notes.

     

    (m)           Reservation of
Shares.  So long as any Notes remain outstanding, the Company
shall take all action necessary to at all times have authorized, and reserved
for the purpose of issuance, no less than 130% of the sum of (i) of the maximum
number of shares of Common Stock issuable upon conversion of the Notes issuable
at the Closing (assuming for purposes hereof, that the Notes are convertible at
the initial Conversion Price and without taking into account any limitations on
the conversion of the Notes set forth in the Notes) and (ii) the maximum number
of shares of Common Stock issuable upon exercise of the Warrants (without taking
into account any limitations on the exercise of the Warrants set forth in the
Warrants).

     

    (n)           Conduct of
Business.  The business of the Company and its Subsidiaries
shall not be conducted in violation of any law, ordinance or regulation of any
governmental entity, except where such violations would not result, either
individually or in the aggregate, in a Material Adverse Effect.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (o)           Stockholder
Approval.  The Company shall provide each stockholder entitled
to vote at a special or annual meeting of stockholders of the Company (the
"Stockholder Meeting"),
which shall be promptly called and held not later than October 31, 2008 (the
"Stockholder Meeting
Deadline"), a proxy statement, substantially in the form which has been
previously reviewed by Schulte Roth & Zabel LLP, at the expense of the
Company, not to exceed $10,000 (which review shall be completed within five (5)
Business Days of such counsel's receipt of the proxy statement and such review
requirement shall be waived if such counsel has not completed its review within
such five (5) Business Day period), soliciting each such stockholder's
affirmative vote at the Stockholder Meeting for approval of resolutions
providing for the Company's issuance of all of the Securities as described in
the Transaction Documents in accordance with applicable law and the rules and
regulations of the Principal Market (such affirmative approval being referred to
herein as the "Stockholder
Approval"), and the Company shall use its reasonable best efforts to
solicit its stockholders' approval of such resolutions  and to cause
the Board of Directors of the Company to recommend to the stockholders that they
approve such resolutions.  The Company shall be obligated to use its
reasonable best efforts to obtain the Stockholder Approval by the Stockholder
Meeting Deadline.  If, despite the Company's reasonable best efforts
the Stockholder Approval is not obtained on or prior to the Stockholder Meeting
Deadline, the Company shall cause an additional Stockholder Meeting to be held
every six (6) months thereafter until such Stockholder Approval is obtained or
the Notes are no longer outstanding.

     

    (p)           Additional Issuances of
Securities.

     

    (i)           
For purposes of this Section 4(p), the following definitions shall
apply.

     

    (1)           "Convertible Securities" means
any stock or securities (other than Options) convertible into or exercisable or
exchangeable for shares of Common Stock.

     

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

     

    (3)           "Common Stock Equivalents"
means, collectively, Options and Convertible Securities.

     

    (ii)           From
the date hereof until the date that is ninety (90) calendar days after the
Initial Effective Date (as defined in the Registration Rights Agreement) (the
"Trigger Date"), the
Company will not, directly or indirectly, offer, sell, grant any option to
purchase, or otherwise dispose of (or announce any offer, sale, grant or any
option to purchase or other disposition of) any of its or its Subsidiaries' debt
with no equity component, equity or equity equivalent securities, including
without limitation any debt, preferred stock or other instrument or security
that is, at any time during its life and under any circumstances, convertible
into or exchangeable or exercisable for shares of Common Stock or Common Stock
Equivalents (any such offer, sale, grant, disposition or announcement being
referred to as a "Subsequent
Placement").

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (iii)           From
the Trigger Date until the later of (a) the two year anniversary of the Initial
Effective Date and (b) the date that less than $500,000 in aggregate principal
amount of Notes remain outstanding, the Company will not, directly or
indirectly, effect any Subsequent Placement unless the Company shall have first
complied with this Section 4(p)(iii).

     

    (1)           The
Company shall deliver to each Buyer an irrevocable written notice
(the "Offer
Notice") of any proposed or intended issuance or sale or exchange
(the "Offer") of
the securities being offered (the "Offered Securities") in a
Subsequent Placement, which Offer Notice shall (w) identify and describe the
Offered Securities, (x) describe the price and other terms upon which they
are to be issued, sold or exchanged, and the number or amount of the Offered
Securities to be issued, sold or exchanged, (y) identify the persons or
entities (if known) to which or with which the Offered Securities are to be
offered, issued, sold or exchanged and (z) offer to issue and sell to or
exchange with such Buyers not less than 50% of the Offered Securities allocated
among such Buyers (a) based on such Buyer's pro rata portion of the aggregate
number of Preferred Shares purchased hereunder (the "Basic Amount"), and (b) with
respect to each Buyer that elects to purchase its Basic Amount, any additional
portion of the Offered Securities attributable to the Basic Amounts of other
Buyers as such Buyer shall indicate it will purchase or acquire should the other
Buyers subscribe for less than their Basic Amounts (the "Undersubscription Amount"),
which process shall be repeated until the Buyers shall have an opportunity to
subscribe for any remaining Undersubscription Amount.

     

    (2)           To
accept an Offer, in whole or in part, such Buyer must deliver a written notice
to the Company prior to the end of the tenth (10th)
Business Day after such Buyer's receipt of the Offer Notice (the "Offer Period"), setting forth
the portion of such Buyer's Basic Amount that such Buyer elects to purchase and,
if such Buyer shall elect to purchase all of its Basic Amount, the
Undersubscription Amount, if any, that such Buyer elects to purchase (in either
case, the "Notice of
Acceptance").  If the Basic Amounts subscribed for by all
Buyers are less than the total of all of the Basic Amounts, then each Buyer who
has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all the Basic Amounts and the Basic Amounts subscribed for (the "Available Undersubscription
Amount"), each Buyer who has subscribed for any Undersubscription Amount
shall be entitled to purchase only that portion of the Available
Undersubscription Amount as the Basic Amount of such Buyer bears to the total
Basic Amounts of all Buyers that have subscribed for Undersubscription Amounts,
subject to rounding by the Company to the extent its deems reasonably
necessary.

     

    (3)           The
Company shall have ten (10) Business Days from the expiration of the Offer
Period above (i) to offer, issue, sell or exchange all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by the
Buyers (the "Refused
Securities") pursuant to a definitive agreement(s) (the "Subsequent Placement
Agreement"), but only to the offerees described in the Offer Notice (if
so described therein) and only upon terms and conditions (including, without
limitation, unit prices and interest rates) that are not more favorable to the
acquiring person or persons or less favorable to the Company than those set
forth in the Offer Notice and (ii) to publicly announce (a) the execution of
such Subsequent Placement Agreement, and (b) either (x) the consummation of the
transactions contemplated by such Subsequent Placement Agreement or (y) the
termination of such Subsequent Placement Agreement (unless the Company
determines that the termination of such Subsequent Placement Agreement is not
material and the Buyers are no longer in possession of material non-public
information upon such termination), which shall be filed with the SEC on a
Current Report on Form 8-K with such Subsequent Placement Agreement and any
documents contemplated therein filed as exhibits thereto.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (4)           In
the event the Company shall propose to sell less than all the Refused Securities
(any such sale to be in the manner and on the terms specified in Section
4(p)(iii)(3) above), then each Buyer may, at its sole option and in its sole
discretion, reduce the number or amount of the Offered Securities specified in
its Notice of Acceptance to an amount that shall be not less than the number or
amount of the Offered Securities that such Buyer elected to purchase pursuant to
Section 4(p)(iii)(2) above multiplied by a fraction, (i) the numerator of which
shall be the number or amount of Offered Securities the Company actually
proposes to issue, sell or exchange (including Offered Securities to be issued
or sold to Buyers pursuant to Section 4(p)(iii)(3) above prior to such
reduction) and (ii) the denominator of which shall be the original amount of the
Offered Securities.  In the event that any Buyer so elects to reduce
the number or amount of Offered Securities specified in its Notice of
Acceptance, the Company may not issue, sell or exchange more than the reduced
number or amount of the Offered Securities unless and until such securities have
again been offered to the Buyers in accordance with Section 4(p)(iii)(1)
above.

     

    (5)           Upon
the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, the Buyers shall acquire from the Company, and the Company
shall issue to the Buyers, the number or amount of Offered Securities specified
in the Notices of Acceptance, as reduced pursuant to Section 4(p)(iii)(4) above
if the Buyers have so elected, upon the terms and conditions specified in the
Offer.  Notwithstanding anything to the contrary contained in this
Agreement, if the Company does not consummate the closing of the issuance, sale
or exchange of all or less than all of the Refused Securities within ten (10)
Business Days of the expiration of the Offer Period, the Company shall issue to
the Buyers the number or amount of Offered Securities specified in the Notices
of Acceptance, as reduced pursuant to Section 4(p)(iii)(4) above if the Buyers
have so elected, upon the terms and conditions specified in the
Offer.  The purchase by the Buyers of any Offered Securities is
subject in all cases to the preparation, execution and delivery by the Company
and the Buyers of a purchase agreement relating to such Offered Securities
reasonably satisfactory in form and substance to the Buyers and their respective
counsel.

     

    (6)           Any
Offered Securities not acquired by the Buyers or other persons in accordance
with Section 4(p)(iii)(3) above may not be issued, sold or exchanged until they
are again offered to the Buyers under the procedures specified in this
Agreement.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (7)           The
Company and the Buyers agree that if any Buyer elects to participate in the
Offer, (x) neither the Subsequent Placement Agreement with respect to such Offer
nor any other transaction documents related thereto (collectively, the "Subsequent Placement
Documents") shall include any term or provisions whereby any Buyer shall
be required to agree to any restrictions in trading as to any securities of the
Company owned by such Buyer prior to such Subsequent Placement, and (y) any
registration rights set forth in such Subsequent Placement Documents shall be
similar in all material respects to the registration rights contained in the
Registration Rights Agreement.

     

    (8)           Notwithstanding
anything to the contrary in this Section 4(p) and unless otherwise agreed to by
the Buyers, the Company shall either confirm in writing to the Buyers that the
transaction with respect to the Subsequent Placement has been abandoned or shall
publicly disclose its intention to issue the Offered Securities, in either case
in such a manner such that the Buyers will not be in possession of material
non-public information, by the twentieth (20th)
Business Day following delivery of the Offer Notice.  If by the
twentieth (20th)
Business Day following delivery of the Offer Notice no public disclosure
regarding a transaction with respect to the Offered Securities has been made,
and no notice regarding the abandonment of such transaction has been received by
the Buyers, such transaction shall be deemed to have been abandoned and the
Buyers shall not be deemed to be in possession of any material, non-public
information with respect to the Company.  Should the Company decide to
pursue such transaction with respect to the Offered Securities, the Company
shall provide each Buyer with another Offer Notice and each Buyer will again
have the right of participation set forth in this Section
4(p)(iii).  The Company shall not be permitted to deliver more than
one such Offer Notice to the Buyers in any 60 day period.

     

    (iv)           The
restrictions contained in subsections (ii) and (iii) of this Section 4(p) shall
not apply in connection with the issuance of any (i) Excluded Securities (as
defined in the Notes) and (ii) any securities issued pursuant to any bona fide
firm commitment underwritten public offering which generates gross proceeds to
the Company in excess of $10,000,000 (other than an "at-the-market offering" as
defined in Rule 415(a)(4) under the 1933 Act and "equity lines").

     

    (q)           Public
Information.  At any time during the period commencing from the
six (6) month anniversary of the Closing Date and ending at such time that all
of the Conversion Shares can be sold either pursuant to a registration
statement, or if a registration statement is not available for the resale of all
of the Securities, may be sold without the requirement for the Company to be in
compliance with Rule 144(c)(1) and otherwise without restriction or limitation
pursuant to Rule 144, if the Company shall fail for any reason to satisfy the
current public information requirement under Rule 144(c) (a "Public Information Failure")
then, as partial relief for the damages to any holder of Notes by reason of any
such delay in or reduction of its ability to sell the Conversion Shares (which
remedy shall not be exclusive of any other remedies available at law or in
equity), the Company shall pay to each such holder an amount in cash equal to
one and one-half percent (1.5%) of the aggregate Purchase Price attributable to
the Notes continued to be held by such holder on the day of a Public Information
Failure and on every thirtieth day (pro rated for periods totaling less than
thirty days) thereafter until the earlier of (i) the date such Public
Information Failure is cured and (ii) such time that such public information is
no longer required pursuant to Rule 144.  The payments to which a
holder shall be entitled pursuant to this Section 4(q) are referred to herein as
"Public Information Failure
Payments."  Public Information Failure Payments shall be paid
on the earlier of (I) the last day of the calendar month during which such
Public Information Failure Payments are incurred
and (II) the third Business Day after the event or failure giving rise to the
Public Information Failure Payments is
cured.  In the event the Company fails to make Public Information
Failure Payments in
a timely manner, such Public Information Failure Payments shall bear
interest at the rate of 1.5% per month (prorated for partial months) until paid
in full.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (r)           Inactive
Subsidiaries.  The Company agrees that each Inactive Subsidiary
shall remain a dormant company until such time as each such Inactive Subsidiary
is dissolved in accordance with the laws of its jurisdiction of
incorporation.  The Company shall not, and shall cause its
Subsidiaries not to, transfer any property or asset to any Inactive
Subsidiary.

     

    (s)           Lock-Up.  Without
the prior written consent of the holders of a majority of the Notes, the Company
shall not amend or waive any provision of any of the Lock-Up Agreements except
to extend the term of the lock-up period.

     

    (t)           Letter of
Credit.

     

    (1)           If
at any time (and from time to time) after the date hereof, the Company or any of
its Subsidiaries consummates a Sale (as defined below), then contemporaneously
with the consummation of such Sale the Company, shall obtain irrevocable letters
of credit (each a "Letter of
Credit", and together the "Letters of Credit") issued in
favor of each of the holders of Notes (each a "Holder", and together the
"Holders"), or increase
each Holder's existing Letter of Credit, as applicable, in the amount of each
Holder's Holder Pro Rata Amount (as defined below) of the proceeds of such Sale
(as increased or decreased pursuant to the terms of this Section 4(t), the
"Holder Letter of Credit
Amount", and collectively, the "Letter of Credit Amount") by a
bank acceptable to the Required Holders (as defined in the Notes) (the "Letter of Credit Bank") and in
form and substance acceptable to the Required Holders.  Each Letter of
Credit, including any renewals, extensions or replacements referred to below,
shall expire not earlier than 91 days after the date the Notes are no longer
outstanding (the "LC Expiration
Date"), unless the applicable Letter of Credit shall have been reduced to
zero in accordance with the terms contained in this Section 4(t) prior to such
date.  As used herein, "Holder Pro Rata Amount" with
respect to any Holder means a fraction (i) the numerator of which is the
principal amount of Notes issued to such Holder on the Closing Date and (ii) the
denominator of which is the aggregate principal amount of all Notes issued to
all Buyers on the Closing Date.  As used herein, "Sale" means any assignment,
conveyance, transfer or other disposition to (including by way of any
assignment, license or granting of rights of such business, technologies and/or
assets), or any exchange of property with, any Person of any of the assets,
property or businesses of the Company or any of its Subsidiaries in one or more
transactions (whether or not such transactions are related) in excess of
$500,000.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (2)           Upon
the occurrence of an Event of Default (as defined in the Notes) with respect to
any Note, at any time after the Company's receipt of the Holder's Event of
Default Redemption Notice (as defined in the Notes), the Holder shall be
entitled to draw under such Holder's Letter of Credit, including any renewals,
extensions or replacements referred to below, an amount equal to the lesser of
(A) the Holder Letter of Credit Amount and (B) such amount then due and payable
under such Holder's Note.  Upon any other payment becoming due and
payable under the Notes, the Holder to which such payment is due may issue
written instructions to the Letter of Credit Bank, entitling such Holder to draw
under such Holder's Letter of Credit, including any renewals, extensions or
replacements referred to below, an amount equal to the payment due or any
portion thereof.

     

    (3)           The
Company shall obtain such renewals, extensions or replacements of the Letters of
Credit as necessary to ensure that the Letters of Credit shall not expire prior
to the LC Expiration Date (unless the Letters of Credit shall have been reduced
to zero in accordance with the terms contained in this Section 4(t) prior to
such date).  If, at any time, the Company cannot obtain a renewal,
extension or replacement of the Letters of Credit such that the Letters of
Credit will expire prior to the LC Expiration Date (a "Withdrawal Event"), the
Company and the Letter of Credit Bank shall each give the Holders written notice
of the occurrence of a Withdrawal Event at least forty-five (45) days prior to
the then current expiration date of the Letter of Credit.  Following a
Withdrawal Event, each Holder shall be entitled to draw down its Holder Letter
of Credit Amount in its entirety (whether or not an Event of Default shall have
occurred or be continuing under such Holder's Note).

     

    (4)           At
such time that a Holder's outstanding amount of Notes is less than such Holder's
Holder Letter of Credit Amount (the difference between the Holder's Holder
Letter of Credit Amount and such Holder's outstanding amount of Notes at such
time, the Holder's "Reduction
Amount") (a "Reduction
Threshold Event"), the Company may deliver a notice to such Holder (the
"LC Reduction Notice"),
certifying as to the occurrence of the Reduction Threshold Event, that no Event
of Default (or event that with the passage of time or giving of notice would
constitute an Event of Default) has occurred or is pending and the aggregate
amount then outstanding under such Holder's Notes.  Within seven (7)
Business Days after the Holder's receipt of the LC Reduction Notice, unless the
Holder reasonably objects to such LC Reduction Notice, the Holder shall issue a
written instruction to the Letter of Credit Bank to request the reduction of its
Holder Letter of Credit Amount by an amount equal to the Reduction Amount;
provided that the Company shall not deliver any LC Reduction Notice requesting a
reduction of less than $100,000.

     

    
      	
               
      

            	
              5.

            	
              REGISTER; TRANSFER
      AGENT INSTRUCTIONS.

            

    

     

    (a)           Register.  The
Company shall maintain at its principal executive offices (or such other office
or agency of the Company as it may designate by notice to each holder of
Securities), a register for the Notes and the Warrants in which the Company
shall record the name and address of the Person in whose name the Notes and the
Warrants have been issued (including the name and address of each transferee),
the principal amount of Notes held by such Person and the number of Conversion
Shares issuable upon conversion of the Notes and the number of Warrant Shares
issuable upon exercise of the Warrants held by such Person.  The
Company shall keep the register open and available at all times during business
hours for inspection of any Buyer or its legal representatives.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (b)           Transfer Agent
Instructions.  The Company shall issue irrevocable instructions
to its transfer agent, and any subsequent transfer agent (the "Transfer Agent"), to issue
certificates or credit shares to the applicable balance accounts at The
Depository Trust Company ("DTC"), registered in the name
of each Buyer or its respective nominee(s), for the Conversion Shares issued
upon conversion of the Notes and the Warrant Shares issued upon the exercise of
the Warrants in such amounts as specified from time to time by each Buyer to the
Company upon conversion of the Notes and exercise of the Warrants in the form of
Exhibit D
attached hereto (the "Irrevocable Transfer Agent
Instructions").  The Company warrants that no instruction in
respect of the Securities other than the Irrevocable Transfer Agent Instructions
referred to in this Section 5(b), and stop transfer instructions to give effect
to Section 2(g) hereof, will be given by the Company to the Transfer Agent, and
that the Securities shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement and the
other Transaction Documents.  If a Buyer effects a sale, assignment or
transfer of the Securities in accordance with Section 2(g), the Company shall
permit the transfer and shall promptly instruct the Transfer Agent to issue one
or more certificates or credit shares to the applicable balance accounts at DTC
in such name and in such denominations as specified by such Buyer to effect such
sale, transfer or assignment.  In the event that such sale, assignment
or transfer involves Conversion Shares sold, assigned or transferred pursuant to
an effective registration statement or pursuant to Rule 144, the Company will,
or will use its reasonable efforts to cause the Transfer Agent to issue such
Securities to the Buyer, assignee or transferee, as the case may be, without any
restrictive legend.  The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to a
Buyer.  Accordingly, the Company acknowledges that the remedy at law
for a breach of its obligations under this Section 5(b) will be inadequate and
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 5(b), that a Buyer shall be entitled, in addition to
all other available remedies, to an order and/or injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.
Nothing in the foregoing shall be interpreted to require the Company or the
Transfer Agent to effect any transfer or take any other action in violation of
applicable federal or state securities laws.

     

    
      	
               
      

            	
              6.

            	
              CONDITIONS TO THE
      COMPANY'S OBLIGATION TO
SELL.

            

    

     

    The
obligation of the Company hereunder to issue and sell the Notes to each Buyer at
the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice
thereof:

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (i)           Such
Buyer shall have executed each of the Transaction Documents to which it is a
party and delivered the same to the Company.

     

    (ii)           Such
Buyer and each other Buyer shall have delivered to the Company the Purchase
Price (less, in the case of Highbridge International LLC, the amounts withheld
pursuant to Section 4(f)) for the Notes being purchased by such Buyer at the
Closing by wire transfer of immediately available funds pursuant to the wire
instructions provided by the Company.

     

    (iii)           The
representations and warranties of such Buyer shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though
made at that time (except for representations and warranties that speak as of a
specific date), and such Buyer shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by such Buyer at or
prior to the Closing Date.

     

    
      	
               
      

            	
              7.

            	
              CONDITIONS TO EACH
      BUYER'S OBLIGATION TO
PURCHASE.

            

    

     

    The
obligation of each Buyer hereunder to purchase the Notes and Warrants at the
Closing is subject to the satisfaction, at or before the Closing Date, of each
of the following conditions, provided that these conditions are for each Buyer's
sole benefit and may be waived by such Buyer at any time in its sole discretion
by providing the Company with prior written notice thereof:

     

    (i)           
The Company shall have executed and delivered to such Buyer (i) each of the
Transaction Documents and (ii) the Notes (in such principal amounts as such
Buyer shall request) and (iii) the related Warrants (in such amounts as such
Buyer shall request), which are being purchased by such Buyer at the Closing
pursuant to this Agreement.

     

    (ii)           Such
Buyer shall have received the opinions of the Company's in-house counsel, dated
as of the Closing Date, in substantially the form of Exhibit E-1
attached hereto.

     

    (iii)           Such
Buyer shall have received the opinions of Lowenstein Sandler PC, the Company's
outside counsel, dated as of the Closing Date, in substantially the form of
Exhibit E-2
attached hereto.

     

    (iv)           The
Company shall have delivered to such Buyer a copy of the Irrevocable Transfer
Agent Instructions, in the form of Exhibit D
attached hereto, which instructions shall have been delivered to and
acknowledged in writing by the Company's transfer agent.

     

    (v)           The
Company shall have delivered to such Buyer a certificate evidencing the
organization and good standing of the Company in the State of Delaware issued by
the Secretary of State of the State of Delaware, as of a date within 10 days of
the Closing Date.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (vi)          The
Company shall have delivered to such Buyer a certificate evidencing the
Company's qualification as a foreign corporation and good standing issued by the
Secretary of State (or comparable office) of each jurisdiction in which the
Company conducts business, as of a date within 10 days of the Closing
Date.

     

    (vii)         The
Company shall have delivered to such Buyer a certified copy of the Certificate
of Incorporation as certified by the Secretary of State of the State of Delaware
within ten (10) days of the Closing Date.

     

    (viii)        The
Company shall have delivered to such Buyer a certificate, executed by the
Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with this transaction as adopted by the Company's Board
of Directors in a form reasonably acceptable to such Buyer, (ii) the Certificate
of Incorporation and (iii) the Bylaws of the Company, each as in effect at the
Closing, in the form attached hereto as Exhibit F.

     

    (ix)           The
representations and warranties of the Company shall be true and correct in all
material respects (other than representations and warranties that are already
qualified by materiality or Material Adverse Effect which shall be true and
correct in all respects) as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date, which shall be true and correct as of such specified
date) and the Company shall have performed, satisfied and complied in all
respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the Company
at or prior to the Closing Date.  Such Buyer shall have received a
certificate, executed by the Chief Executive Officer of the Company, dated as of
the Closing Date, to the foregoing effect and as to such other matters as may be
reasonably requested by such Buyer in the form attached hereto as Exhibit
G.

     

    (x)            The
Company shall have delivered to such Buyer a letter from the Company's transfer
agent certifying the number of shares of Common Stock outstanding as of a date
within five days of the Closing Date.

     

    (xi)          
The Company's officers shall have entered into a Lock-Up Agreement in the form
attached hereto as Exhibit H (the "Lock-Up
Agreements").

     

    (xii)          The
Common Stock (I) shall be listed on a Trading Market and (II) shall not have
been suspended, as of the Closing Date, by the SEC or a Trading Market from
trading on a Trading Market nor shall suspension by the SEC or a Trading Market
have been threatened, as of the Closing Date, either (A) in writing by the SEC
or a Trading Market or (B) by falling below the minimum listing maintenance
requirements of a Trading Market.

     

    (xiii)         The
Company shall have obtained all governmental, regulatory or third party consents
and approvals, if any, necessary for the sale of the Securities.

     

    (xiv)         The
Company shall have delivered to such Buyer such other documents relating to the
transactions contemplated by this Agreement as such Buyer or its counsel may
reasonably request.

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    8.            
TERMINATION.  In
the event that the Closing shall not have occurred with respect to a Buyer on or
before five (5) Business Days from the date hereof due to the Company's or such
Buyer's failure to satisfy the conditions set forth in Sections 6 and 7 above
(and the nonbreaching party's failure to waive such unsatisfied condition(s)),
the nonbreaching party shall have the option to terminate this Agreement with
respect to such breaching party at the close of business on such date without
liability of any party to any other party; provided, however, that if this
Agreement is terminated pursuant to this Section 8, the Company shall remain
obligated to reimburse the non-breaching Buyers for the expenses described in
Section 4(f) above.

     

    
      	
               
      

            	
              9.

            	
              MISCELLANEOUS.

            

    

     

    (a)           
Governing Law;
Jurisdiction; Jury Trial.  All questions concerning the
construction, validity, enforcement and interpretation of this Agreement 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.  Each
party 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.  Each party
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by mailing a copy thereof to
such party at the address for such notices to it under this Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof.  Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by
law.  EACH PARTY
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 AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.

     

    (b)           Counterparts.  This
Agreement may be executed in two or more identical counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall
be binding upon the signatory thereto with the same force and effect as if the
signature were an original, not a facsimile signature.

     

    (c)        
   Headings.  The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement.

     

    (d)           Severability.  If
any provision of this Agreement is prohibited by law or otherwise determined to
be invalid or unenforceable by a court of competent jurisdiction, the provision
that would otherwise be prohibited, invalid or unenforceable shall be deemed
amended to apply to the broadest extent that it would be valid and enforceable,
and the invalidity or unenforceability of such provision shall not affect the
validity of the remaining provisions of this Agreement so long as this Agreement
as so modified continues to express, without material change, the original
intentions of the parties as to the subject matter hereof and the prohibited
nature, invalidity or unenforceability of the provision(s) in question does not
substantially impair the respective expectations or reciprocal obligations of
the parties or the practical realization of the benefits that would otherwise be
conferred upon the parties.  The parties will endeavor in good faith
negotiations to replace the prohibited, invalid or unenforceable provision(s)
with a valid provision(s), the effect of which comes as close as possible to
that of the prohibited, invalid or unenforceable provision(s).

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (e)          
 Entire
Agreement; Amendments.  This Agreement and the other
Transaction Documents supersede all other prior oral or written agreements
between the Buyers, the Company, their Affiliates and Persons acting on their
behalf with respect to the matters discussed herein, and this Agreement, the
other Transaction Documents and the instruments referenced herein and therein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters.  No provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and the holders of at least a majority of the aggregate number of
Securities such Buyers are obligated to purchase (on an as converted or
exercised basis), or, if prior to the Closing Date, the Company and the Buyers
listed on the Schedule of Buyers as being obligated to purchase at least a
majority of the aggregate number of Securities outstanding on such date (on an
as converted or exercised basis), and any amendment to this Agreement made in
conformity with the provisions of this Section 9(e) shall be binding on all
Buyers and holders of Securities, as applicable.  No provision hereof
may be waived other than by an instrument in writing signed by the party against
whom enforcement is sought.  No such amendment shall be effective to
the extent that it applies to less than all of the holders of the applicable
Securities then outstanding.  No consideration shall be offered or
paid to any Person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration also
is offered to all of the parties to the Transaction Documents, holders of
Notes.  The Company has not, directly or indirectly, made any
agreements with any Buyers relating to the terms or conditions of the
transactions contemplated by the Transaction Documents except as set forth in
the Transaction Documents.  Without limiting the foregoing, the
Company confirms that, except as set forth in this Agreement, no Buyer has made
any commitment or promise or has any other obligation to provide any financing
to the Company or otherwise.

     

    (f)          
 Notices.  Any
notices, consents, waivers or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed to
have been delivered:  (i) upon receipt, when delivered personally;
(ii) upon receipt, when sent by facsimile (provided confirmation of transmission
is mechanically or electronically generated and kept on file by the sending
party); or (iii) one Business Day after deposit with an overnight courier
service, in each case properly addressed to the party to receive the
same.  The addresses and facsimile numbers for such communications
shall be:

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    If to the
Company:

     

    Arotech
Corporation

    1229 Oak
Valley Drive

    Ann
Arbor, Michigan 48108

    Facsimile
No.:     734-761-5836

    Telephone
No.:  734-761-5368

     

    Attention:
Tom Paup

     

    With a
copy to:

     

    Electric
Fuel (E.F.L.) Ltd.

    One
HaSolela Street, POB 641

    Western
Industrial Park

    Beit
Shemesh 99000, Israel

    Facsimile
No.:     011-972-2-990-6688

    Telephone
No.:  011-972-2-990-6623

    Attention:
General Counsel

     

    With a
copy (for informational purposes only) to:

     

    Lowenstein
Sandler PC

    65
Livingston Avenue

    Roseland,
New Jersey 07068

    Facsimile
No.:     (973) 597-2477

    Telephone
No.:  (973) 597-2500

    Attention:
Steven Skolnick, Esq.

     

    If to the
Transfer Agent:

     

    American
Stock Transfer and Trust Company

    6201
15th
Avenue

    Brooklyn,
New York 11219

    Facsimile
No.:     (718) 234-5001

    Telephone
No.:   (718) 921-8200

    Attention:
Herbert J. Lemmer, Esq., Vice President

     

    If to a
Buyer, to its address and facsimile number set forth on the Schedule of Buyers,
with copies to such Buyer's representatives as set forth on the Schedule of
Buyers,

     

    with a
copy (for informational purposes only) to:

     

    Schulte
Roth & Zabel LLP

    919 Third
Avenue

    New York,
New York  10022

    Telephone:  (212)
756-2000

    Facsimile:     (212)
593-5955

    Attention:    Eleazer
N. Klein, Esq.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    or to
such other address and/or facsimile number and/or to the attention of such other
Person as the recipient party has specified by written notice given to each
other party five (5) days prior to the effectiveness of such
change.  Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by an overnight courier service shall be rebuttable
evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above,
respectively.

     

    (g)           Successors and
Assigns.  This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including
any purchasers of the Notes or Warrants.  The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the holders of at least a majority of the aggregate number of
Securities outstanding on such date (on an as converted or exercised basis),
including by way of a Fundamental Transaction (unless the Company is in
compliance with the applicable provisions governing Fundamental Transactions set
forth in the Notes).  A Buyer may assign some or all of its rights
hereunder without the consent of the Company, in which event such assignee shall
be deemed to be a Buyer hereunder with respect to such assigned
rights.

     

    (h)           No Third Party
Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person.

     

    (i)           
Survival.  Unless
this Agreement is terminated under Section 8, the representations and warranties
of the Company and the Buyers contained in Sections 2 and 3 and the agreements
and covenants set forth in Sections 4, 5 and 9 shall survive the
Closing.  Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.

     

    (j)         
  Further
Assurances.  Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

     

    (k)       
    Indemnification.  In
consideration of each Buyer's execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Company's other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless each Buyer and each other holder of
the Securities and all of their stockholders, partners, members, officers,
directors, employees and direct or indirect investors and any of the foregoing
Persons' agents or other representatives (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the "Indemnitees") from and against
any and all actions, causes of action, suits, claims, losses, costs, penalties,
fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys' fees
and disbursements (the "Indemnified Liabilities"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby or
(c) any cause of action, suit or claim brought or made against such Indemnitee
by a third party (including for these purposes a derivative action brought on
behalf of the Company) and arising out of or resulting from (i) the execution,
delivery, performance or enforcement of the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, or (iii) the
status of such Buyer or holder of the Securities as an investor in the Company
pursuant to the transactions contemplated by the Transaction
Documents.  To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.  Except as
otherwise set forth herein, the mechanics and procedures with respect to the
rights and obligations under this Section 9(k) shall be the same as those set
forth in Section 6 of the Registration Rights Agreement.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (l)            
No Strict
Construction.  The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any
party.

     

    (m)           Remedies.  Each
Buyer and each holder of the Securities shall have all rights and remedies set
forth in the Transaction Documents and all rights and remedies which such
holders have been granted at any time under any other agreement or contract and
all of the rights which such holders have under any law.  Any Person
having any rights under any provision of this Agreement shall be entitled to
enforce such rights specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law.  Furthermore, the Company
recognizes that in the event that it fails to perform, observe, or discharge any
or all of its obligations under the Transaction Documents, any remedy at law may
prove to be inadequate relief to the Buyers.  The Company therefore
agrees that the Buyers shall be entitled to seek temporary and permanent
injunctive relief in any such case without the necessity of proving actual
damages and without posting a bond or other security.

     

    (n)           Payment Set
Aside.  To the extent that the Company makes a payment or
payments to the Buyers hereunder or pursuant to any of the other Transaction
Documents or the Buyers enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, foreign, state or federal law, common law or equitable cause of
action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in
full force and effect as if such payment had not been made or such enforcement
or setoff had not occurred.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (o)           Independent Nature of
Buyers' Obligations and Rights.  The obligations of each Buyer
under any Transaction Document are several and not joint with the obligations of
any other Buyer, and no Buyer shall be responsible in any way for the
performance of the obligations of any other Buyer under any Transaction
Document.  Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be
deemed to constitute the Buyers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Buyers are
in any way acting in concert or as a group with respect to such obligations or
the transactions contemplated by the Transaction Documents.  Each
Buyer confirms that it has independently participated in the negotiation of the
transaction contemplated hereby with the advice of its own counsel and
advisors.  Each Buyer shall be entitled to independently protect and
enforce its rights, including, without limitation, the rights arising out of
this Agreement or out of any other Transaction Documents, and it shall not be
necessary for any other Buyer to be joined as an additional party in any
proceeding for such purpose.

     

    

    [Signature
Page Follows]

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Securities
Purchase Agreement to be duly executed as of the date first written
above.

     

     

    
      	 
      	
              COMPANY:

            	 
	 
      	 
      	 
      	 
	 
      	
              AROTECH
      CORPORATION

               

            	 
	 
      	
              By:

            	 	 
	 
      	 
      	
              Name:  Robert
      S. Ehrlich

            	 
	 
      	 
      	
              Title:  Chairman
      and Chief Executive

            	 
	 
      	 
      	
              Officer

            	 

    

    

      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Securities
Purchase Agreement to be duly executed as of the date first written
above.

     

     

    
      	 	BUYERS:	 
	 	 
      	 
      	 
	 	
              HIGHBRIDGE
      INTERNATIONAL LLC

               

            	 
	 	
              By:

            	
              Highbridge
      Capital Management, LLC,

            	 
	 	 
      	
              Its
      Trading Manager

            	 
	 	 
      	 
      	 
	 	 
      	 
      	 
	 	
              By:

            	 
      	 
	 	 
      	
              Name:
      Adam J. Chill

            	 
	 	 
      	
              Title:   Managing
      Director

            	 
	 	 
      	 
      	 

    

     

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

    

    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Securities
Purchase Agreement to be duly executed as of the date first written
above.

     

     

    
      	 	OTHER
      BUYERS:	 
	 	 
      	 
      	 
	 	CRANSHIRE
      CAPITAL L.P.	 
	 	 
      	 
      	 
	 	 
      	 
      	 
	 	
              By:

            	 	 
	 	 
      	
              Name:

            	 
	 	 
      	
              Title:

            	 

    

    

      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Securities
Purchase Agreement to be duly executed as of the date first written
above.

     

     

    
      	 	OTHER
      BUYERS:	 
	 	 
      	 
      	 
	 	IROQUOIS
      MASTER FUND LTD.	 
	 	 
      	 
      	 
	 	 
      	 
      	 
	 	
              By:

            	 	 
	 	 
      	
              Name:

            	 
	 	 
      	
              Title:

            	 

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    SCHEDULE
OF BUYERS

     

     

    
      	
              (1)

            	 	 	
              (2)

            	 	 	
              (3)

            	 	 	
              (4)

            	 	 	
              
              

              (5)

            	 	 	
              (6)

            
	
              
                 

                Buyer

              

            	 	 	
              
                 

                Address
      and Facsimile Number

              

            	 	 	
              
                Aggregate
      Principal Amount of Notes

              

            	 	 	
              
                Aggregate
      Number

                of
      Warrant Shares

              

            	 	 	
              
                Purchase
      Price

              

            	 	 	
              
                Legal
      Representative's

                Address
      and Facsimile Number

              

            
	 
      	 	 	 
      	 	 	 	 	 	 	 	 	 	 	 	 
      
	
              Highbridge

            	 	 	
              c/o
      Highbridge Capital Management,

            	 	 	$	4,450,000	 	 	 	496,652	 	 	$	4,450,000	 	 	
              Schulte
      Roth & Zabel LLP

            
	
              International
      LLC

            	 	 	
              LLC

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              919
      Third Avenue

            
	 
      	 	 	
              9
      West 57th
      Street, 27th
      Floor

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              New
      York, New York  10022

            
	 
      	 	 	
              New
      York, New York  10019

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              Attention:  Eleazer
      Klein, Esq.

            
	 
      	 	 	
              Attention:  Ari
      J. Storch

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              Facsimile:  (212)
      593-5955

            
	 
      	 	 	
              Adam
      J. Chill

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              Telephone:  (212)
      756-2376

            
	 
      	 	 	
              Facsimile:  (212)
      751-0755

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              Email:
      eleazer.klein@srz.com

            
	 
      	 	 	
              Telephone:
      (212) 287-4720

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Residence:  Cayman
      Islands

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Email:
      ari.storch@highbridge.com /

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              adam.chill@highbridge.com

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	 
      	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	
              Cranshire
      Capital L.P.

            	 	 	
              c/o
      Downsview Capital, Inc.

            	 	 	$	300,000	 	 	 	33,482	 	 	$	300,000	 	 	 
      
	 
      	 	 	
              The
      General Partner

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              3100
      Dundee Road,

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Suite
      703

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Northbrook,
      IL  60062

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Attention: 
      Mitchell P. Kopin

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Facsimile: 
      (847) 562-9031

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Telephone: 
      (847) 562-9030

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Residence:
      Illinois

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Email:
      mkopin@cranshirecapital.com

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	 
      	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	
              Iroquois
      Master Fund Ltd.

            	 	 	
              Iroquois
      Master Fund Ltd.

            	 	 	$	250,000	 	 	 	27,902	 	 	$	250,000	 	 	 
      
	 
      	 	 	
              641
      Lexington Ave.

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              26th
      Floor

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              New
      York, New York  10022

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Facsimile:  (646)
      274-1728

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Telephone:   (212)
      974-3070

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Attention:  Joshua
      Silverman

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Residence:  Cayman
      Islands

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Email:
      JSilverman@icfund.com

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	
              Totals

            	 	 	 
      	 	 	$	5,000,000	 	 	 	558,036	 	 	$	5,000,000	 	 	 
      

    

    

      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    EXHIBITS

     

    
      	
              Exhibit
      A

            	 
      	
              Form
      of Notes

            
	
              Exhibit
      B

            	 
      	
              Form
      of Warrant

            
	
              Exhibit
      C

            	 
      	
              Registration
      Rights Agreement

            
	
              Exhibit
      D

            	 
      	
              Irrevocable
      Transfer Agent Instructions

            
	
              Exhibit
      E-1

            	 
      	
              Form
      of In-House Company Counsel Opinion

            
	
              Exhibit
      E-2

            	 
      	
              Form
      of Outside Company Counsel Opinion

            
	
              Exhibit
      F

            	 
      	
              Form
      of Secretary's Certificate

            
	
              Exhibit
      G

            	 
      	
              Form
      of Officer's Certificate

            
	
              Exhibit
      H

            	 
      	
              Form
      of Lock-Up Agreement

            
	
              Exhibit
      I

            	 
      	
              Form
      of DEI 10% Senior Subordinated Convertible
Noteex4_2.htm

    
      

    

    EXHIBIT
4.2

     

    EXECUTION
COPY

    

     

    [FORM
OF SENIOR CONVERTIBLE NOTE]

     

    NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR APPLICABLE
STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE 1933 ACT, OR (B) AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.  ANY TRANSFEREE OF THIS NOTE
SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND
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.

     

    Arotech
Corporation

     

     

    Senior
Convertible Note

     

     

    
      	
              Issuance
      Date:  August 14, 2008

            	
              Original
      Principal Amount:

              U.S.$[4,450,000][300,000][250,000]

            

    

    

    FOR VALUE RECEIVED, Arotech
Corporation a Delaware corporation (the "Company"), hereby promises to
pay to the order of [HIGHBRIDGE INTERNATIONAL LLC][ CRANSHIRE CAPITAL
L.P.][IROQUOIS MASTER FUND LTD.] 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), on any Installment Date with respect
to the Installment Amount due on such Installment Date (each, as defined
herein), acceleration, redemption or otherwise (in each case in accordance with
the terms hereof) and to pay interest ("Interest") on any outstanding
Principal at a rate per annum equal to the Interest Rate (as defined below),
from the date set out above as the Issuance Date (the "Issuance Date") until the same becomes
due and payable, whether upon an Interest Date (as defined below), any
Installment Date, the Maturity Date, acceleration, conversion, redemption or
otherwise (in each case in accordance with the terms hereof).  This
Senior Convertible Note (including all Senior Convertible Notes issued in
exchange, transfer or replacement hereof, this "Note") is one of an issue of
Senior Convertible Notes (collectively, the "Notes" and such other Senior
Convertible Notes, the "Other Notes") issued pursuant to
Section 1(a) of the Securities Purchase Agreement (as defined
below).  Certain capitalized terms are defined in Section
30.

    

      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    (1)           MATURITY.  On
each Installment Date, the Company shall pay to the Holder an amount equal to
the Installment Amount due on such Installment Date in accordance with Section
8.  On the Maturity Date, the Company shall pay to the Holder an
amount in cash representing all outstanding Principal, accrued and unpaid
Interest and accrued and unpaid Late Charges, if any, on such Principal and
Interest.  The "Maturity Date" shall be August 15,
2011, as may be extended at the option of the Holder (i) in the event that, and
for so long as, an Event of Default (as defined in Section 4(a)) shall have
occurred and be continuing on the Maturity Date (as may be extended pursuant to
this Section 1) or any event shall have occurred and be continuing on the
Maturity Date (as may be extended pursuant to this Section 1) that with the
passage of time and the failure to cure would result in an Event of Default and
(ii) through the date that is ten (10) Business Days after the consummation of a
Change of Control in the event that a Change of Control is publicly announced or
a Change of Control Notice (as defined in Section 5(b)) is delivered prior to
the Maturity Date.

     

    (2)           INTEREST; INTEREST
RATE.  Interest on this Note shall commence accruing on the
Issuance Date and shall be computed on the basis of a 360-day year comprised of
twelve (12) thirty (30) day months and shall be payable in arrears on each
February 15, May 15, August 15 and November 15 of each year (each, an "Interest Date") with the first Interest
Date being November 15, 2008.  Interest shall be payable on each
Interest Date, each Conversion Date (as defined below) and other applicable
circumstances in cash, unless such Interest is converted pursuant to Section
3(c) hereof.  Prior to the payment of Interest on an Interest Date,
Conversion Date or otherwise, Interest on this Note shall accrue at the Interest
Rate and be payable by way of inclusion of the Interest in the Conversion Amount
on each Conversion Date in accordance with Section 3(b)(i).  From and
after the occurrence of an Event of Default, the Interest Rate shall be
increased to fifteen percent (15.0%).  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 at such increased rate during the continuance of such
Event of Default shall continue to apply to the extent relating to the days
after the occurrence of such Event of Default through and including the date of
cure of such Event of Default.

     

    (3)           CONVERSION OF
NOTES.  This Note shall be convertible into shares of common
stock of the Company, par value $0.01 per share (the "Common Stock"), on the terms
and conditions set forth in this Section 3.

     

    (a)           Conversion
Right.  Subject to the provisions of Section 3(e), 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 nonassessable shares of Common Stock in accordance with
Section 3(c), at the Conversion Rate (as defined below).  The Company
shall not issue any fraction of a share of Common Stock upon any
conversion.  If the issuance would result in the issuance of a
fraction of a share of Common Stock, the Company shall round such fraction of a
share of Common Stock up or down to the nearest whole share.  The
Company shall pay any and all taxes that may be payable with respect to the
issuance and delivery of Common Stock upon conversion of any Conversion
Amount.

    
      
         

      

      
        - 2
-

        
          

        

      

      
         

      

    

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

     

    (i)           "Conversion Amount" means the
sum of (A) the portion of the Principal to be converted, redeemed or otherwise
with respect to which this determination is being made, (B) accrued and unpaid
Interest with respect to such Principal and (C) accrued and unpaid Late Charges
with respect to such Principal and Interest.

     

    (ii)          "Conversion Price" means, as of
any Conversion Date (as defined below) or other date of determination, two
dollars and twenty-five cents ($2.25), subject to further 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 electronic mail (with a facsimile within 24
hours of such electronic mail) (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 an
overnight courier service for delivery to the Company as soon as practicable on
or following such date (or an indemnification undertaking with respect to this
Note in the case of its loss, theft or destruction).  On or before the
first (1st)
Business Day following the date of receipt of a Conversion Notice, the Company
shall transmit by facsimile or electronic mail (with a facsimile within 24 hours
of such electronic mail) a notice confirming receipt of such Conversion Notice
to the Holder and the Company's transfer agent (the "Transfer
Agent").  On or before the second (2nd)
Business Day following the date of receipt of a Conversion Notice (the "Share Delivery Date"), the Company shall (1)
(X) provided the Transfer Agent is participating in the Depository Trust Company
("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 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) if applicable, pay to the Holder in accordance with Section
3(d), an amount equal to the Make-Whole Amount.  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 a new Note (in
accordance with Section 18(d)) representing the outstanding Principal not
converted.  The Person or Persons entitled to receive the shares of
Common Stock issuable upon a conversion of this Note shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on the
Conversion Date.  In the event of a partial conversion of this Note
pursuant hereto, the Principal amount converted shall be deducted from the
Installment Amounts relating to the Installment Dates as set forth in the
Conversion Notice.

    
      
         

      

      
        - 3
-

        
          

        

      

      
         

      

    

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

     

    (iii)         Registration;
Book-Entry.  The Company shall maintain a register (the "Register") for the recordation
of the names and addresses of the holders of each Note and the principal amount
of the Notes held by such holders (the "Registered
Notes").  The entries in the Register shall be conclusive and
binding for all purposes absent manifest error.  The Company and the
holders of the Notes shall treat each Person whose name is recorded in the
Register as the owner of a Note for all purposes, including, without limitation,
the right to receive payments of Principal and Interest hereunder,
notwithstanding notice to the contrary.  A Registered Note may be
assigned or sold in whole or in part only by registration of such assignment or
sale on the Register.  Upon its receipt of a request to assign or sell
all or part of any Registered Note by a Holder, the Company shall record the
information contained therein in the Register and issue one or more new
Registered Notes in the same aggregate principal amount as the principal amount
of the surrendered Registered Note to the designated assignee or transferee
pursuant to Section 18.  Notwithstanding anything to the contrary set
forth herein, upon conversion of any portion of this Note in accordance with the
terms hereof, the Holder shall not be required to physically surrender this Note
to the Company unless (A) the full 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 physical
surrender and reissue of this Note.  The Holder and the Company shall
maintain records ("Records") showing the
Principal, Interest and Late Charges, if any, converted or paid and the dates of
such conversions or payments 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.  Within three (3) Trading Days
after each Share Delivery Date, the Company shall send the Holder a copy of its
Records showing the Principal and Interest converted or paid and the dates of
such conversions or payments as of the day following such Share Delivery Date;
failure of the Holder to object to the accuracy of the information contained in
such Records within two (2) Trading Days of receipt thereof will establish a
rebuttable presumption that such Records were accurate on the day following such
Share Delivery Date.  Any dispute as to the accuracy of any Records
will be resolved in accordance with Section 23.

    
      
         

      

      
        - 4
-

        
          

        

      

      
         

      

    

    (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(e), shall convert from each
holder of Notes electing to have Notes converted on such date a pro rata amount
of such holder's portion of its Notes submitted for conversion based on the
principal amount of Notes submitted for conversion on such date by such holder
relative to the aggregate principal amount of all Notes submitted for conversion
on such date.  In the event of a dispute as to the number of shares of
Common Stock issuable to the Holder in connection with a conversion of this
Note, the Company shall issue to the Holder the number of shares of Common Stock
not in dispute and resolve such dispute in accordance with Section
23.

     

    
      	
               
      

            	
              (d)

            	
              Make-Whole
      Amount.

            

    

     

    (i)           General.  On
each applicable Share Delivery Date, the Company shall pay to the Holder of this
Note the Make-Whole Amount due on such date with respect to such Conversion
Amount by converting such Make-Whole Amount pursuant to Section 3(d)(ii) below,
provided that the Equity Conditions have been satisfied (or waived in writing by
the Holder except that the Holders may not waive any Equity Condition to the
extent such waiver would cause the Company to be in violation of the rules and
regulations of the Principal Market), in accordance with this Section 3(d) (a
"Company Make-Whole
Conversion"); provided, however, that the Company may, at its option
following an effective Make-Whole Election (as defined below) to the Holder, pay
the Make-Whole Amount by redeeming such Make-Whole Amount (a "Company Make-Whole
Redemption") or by any combination of a Company Make-Whole Conversion and
a Company Make-Whole Redemption so long as all of the outstanding applicable
Make-Whole Amount shall be converted and/or redeemed by the Company on the
applicable Share Delivery Date, subject to the provisions of this Section
3(d).  At any time after the Issuance Date, in the event that the
Company no longer desires to pay the Make-Whole Amount entirely as a Company
Make-Whole Conversion, the Company shall deliver a written notice to all holders
(each, a "Make-Whole
Election" and the date all of the holders receive such notice is referred
to as the "Make-Whole Election
Date") which Make-Whole Election shall (i) indicate the portion of the
applicable Make-Whole Amount that shall be converted pursuant to a Company
Make-Whole Conversion (such amount to be converted, the "Company Make-Whole Conversion
Amount") and the portion of the applicable Make-Whole Amount that the
Company elects to redeem, in whole or in part (such amount to be redeemed, the
"Company Make-Whole
Redemption Amount") and
(ii) if the Make-Whole Amount is to be paid, in whole or in part, pursuant to a
Company Make-Whole Conversion, certify that the Equity Conditions have been
satisfied as of the applicable Make-Whole Election Date and the Company
reasonably expects that the Equity Conditions will be satisfied as of the
Conversion Date.  Notwithstanding the foregoing, a Make-Whole Election
shall not be effective with respect to any conversions under this Note until the
twenty-fourth (24th)
Trading Day after the applicable Make-Whole Election Date.  If the
Company does not deliver a Make-Whole Election in accordance with this Section
3(d), then the Company shall be deemed to have delivered a Make-Whole Election
confirming a Company Make-Whole Conversion and shall be deemed to have certified
that the Equity Conditions in connection with any such conversion have been
satisfied.  The Company Make-Whole Conversion Amount shall be
converted in accordance with Section 3(d)(ii) and the Company Make-Whole
Redemption Amount shall be redeemed in accordance with Section
3(d)(iii).

    
      
         

      

      
        - 5
-

        
          

        

      

      
         

      

    

    (ii)   
      Mechanics of Company
Conversion.  Subject to Section 3(e), in the event of a Company
Make-Whole Conversion, then on the Share Delivery Date, the Company shall
deliver to the Holder's account with DTC such number of shares of Common Stock
(the "Initial Make-Whole
Shares," which for purposes of the Transaction Documents, shall be
considered Conversion Shares) equal to the quotient of (x) the Company
Make-Whole Conversion Amount with respect to the applicable Conversion Date
divided
by (y) the Initial Make-Whole Conversion Price.  In addition,
on the twenty-fourth (24th)
Trading Day following the applicable Conversion Date (the "Make-Whole Settlement Date"),
the Company shall deliver to the Holder's account with DTC an additional number
of shares of Common Stock equal to the Make-Whole Balance Shares (which for
purposes of the Transaction Documents shall be considered Conversion
Shares).  If there is an Equity Conditions Failure at any time during
the Additional Make-Whole Measuring Period, then, at the option of the Holder
designated in writing to the Company, the Holder may require the Company to pay,
by wire transfer of immediately available funds, an amount in cash equal to the
product of (x) the Make-Whole Balance Shares by (y) the greatest of, the Initial
Make-Whole Conversion Price, the Additional Make-Whole Conversion Price and the
Conversion Price.  If the Company fails to deliver the cash required
pursuant to the preceding sentence on or before the applicable Make-Whole
Settlement Date by payment of such amount on the applicable Make-Whole
Settlement Date, then the Holder shall have the rights set forth in Section
10(a) as if the Company failed to pay the applicable Company Make-Whole
Redemption Amount and all other rights under this Note (including, without
limitation, such failure constituting an Event of Default described in Section
4(a)(v)).

     

    (iii)         Mechanics of Company
Redemption.  If the Company elects a Company Make-Whole
Redemption in accordance with Section 3(d)(i), then the Company Make-Whole
Redemption Amount which is to be paid to the Holder on the applicable Share
Delivery Date shall be redeemed by the Company and the Company shall pay to the
Holder on such Share Delivery Date, by wire transfer of immediately available
funds, an amount in cash equal to 100% of the Company Make-Whole Redemption
Amount.  If the Company fails to redeem the Company Make-Whole
Redemption Amount on the applicable Make-Whole Settlement Date by payment of the
Company Make-Whole Redemption Amount on such date, then at the option of the
Holder designated in writing to the Company (any such designation, a "Conversion Notice" for
purposes of this Note), the Holder may require the Company to convert all or any
part of the Company Make-Whole Redemption Amount at the lowest of (A) the
Initial Make-Whole Conversion Price, (B) the Additional Make-Whole Conversion
Price, and (C) the Conversion Price.  Conversions required by this
Section 3(d)(iii) shall be made in accordance with the provisions of Section
3(c).  Notwithstanding anything to the contrary in this Section
3(d)(iii), but subject to Section 3(e), until the Company Make-Whole Redemption
Amount (together with any interest thereon) is paid in full, the Company
Make-Whole Redemption Amount (together with any interest thereon) may be
converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3.

    
      
         

      

      
        - 6
-

        
          

        

      

      
         

      

    

    
      	
               
      

            	
              (e)

            	
              Limitations on
      Conversions.

            

    

     

    (i)           Beneficial
Ownership.  The Company shall not effect any conversion of this
Note, and the Holder of this Note shall not have the right to convert any
portion of this Note pursuant to Section 3(a), to the extent that after giving
effect to such conversion, the Holder (together with the Holder's affiliates)
would beneficially own in excess of 4.99% (the "Maximum Percentage") of the
number of shares of Common Stock outstanding immediately after giving effect to
such conversion.  For purposes of the foregoing sentence, the number
of shares of Common Stock beneficially owned by the Holder and its affiliates
shall include the number of shares of Common Stock issuable upon conversion of
this Note with respect to which the determination of such sentence is being
made, but shall exclude the number of shares of Common Stock which would be
issuable upon (A) conversion of the remaining, nonconverted portion of this Note
beneficially owned by the Holder or any of its affiliates and (B) exercise or
conversion of the unexercised or nonconverted portion of any other securities of
the Company (including, without limitation, any Other Notes) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its
affiliates.  Except as set forth in the preceding sentence, for
purposes of this Section 3(e)(i), beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended.  For purposes of this Section 3(e)(i), in determining the
number of outstanding shares of Common Stock, the Holder may rely on the number
of outstanding shares of Common Stock as reflected in (x) the Company's most
recent Form 10-K, Form 10-Q or Form 8-K, as the case may be (y) a more recent
public announcement by the Company or (z) any other notice by the Company or the
Transfer Agent setting forth the number of shares of Common Stock
outstanding.  For any reason at any time, upon the written or oral
request of the Holder, the Company shall within one (1) Business Day confirm
orally and in writing to the Holder the number of shares of Common Stock then
outstanding.  In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Note, by the Holder or its affiliates
since the date as of which such number of outstanding shares of Common Stock was
reported.  By written notice to the Company, the Holder may increase
or decrease the Maximum Percentage to any other percentage not in excess of
9.99% specified in such notice; provided that (x) any such increase will not be
effective until the sixty-first (61st) day
after such notice is delivered to the Company, and (y) any such increase or
decrease will apply only to the Holder and not to any other holder of
Notes.  The provisions of this paragraph shall be construed and
implemented in a manner otherwise than in strict conformity with the terms of
this Section 3(e)(i) to correct this paragraph (or any portion hereof) which may
be defective or inconsistent with the intended beneficial ownership limitation
herein contained or to make changes or supplements necessary or desirable to
properly give effect to such limitation.

     

    (ii)          Principal Market
Regulation.  Unless and until the Stockholder Approval (as
defined in the Securities Purchase Agreement) has been obtained, the Company
shall not (A) be obligated to issue any shares of Common Stock upon conversion
of this Note and (B) issue any shares of Common Stock under this Note as payment
of principal or interest, if the issuance of such shares of Common Stock would
exceed the aggregate number of shares of Common Stock which the Company may
issue upon conversion of the Notes without breaching the Company's obligations
under the rules or regulations of the Principal Market (the "Exchange
Cap").  Until such Stockholder Approval is obtained, no
purchaser of the Notes pursuant to the Securities Purchase Agreement (the "Purchasers") shall be issued
in the aggregate, upon conversion of the Notes, shares of Common Stock (as
adjusted for stock splits, stock dividends, stock combinations and other similar
transactions) in an amount greater than the product of the Exchange Cap
multiplied by a fraction, the numerator of which is the principal amount of
Notes issued to the Purchasers pursuant to the Securities Purchase Agreement on
the Closing Date and the denominator of which is the aggregate principal amount
of all Notes issued to the Purchasers pursuant to the Securities Purchase
Agreement on the Closing Date (with respect to each Purchaser, the "Exchange Cap
Allocation").  In the event that any Purchaser shall sell or
otherwise transfer any of such Purchaser's Notes, the transferee shall be
allocated a pro rata portion of such Purchaser's Exchange Cap Allocation, and
the restrictions of the prior sentence shall apply to such transferee with
respect to the portion of the Exchange Cap Allocation allocated to such
transferee.  In the event that any holder of Notes shall convert all
of such holder's Notes into a number of shares of Common Stock which, in the
aggregate, is less than such holder's Exchange Cap Allocation, then the
difference between such holder's Exchange Cap Allocation and the number of
shares of Common Stock actually issued to such holder shall be allocated to the
respective Exchange Cap Allocations of the remaining holders of Notes on a pro
rata basis in proportion to the aggregate principal amount of the Notes then
held by each such holder.

    
      
         

      

      
        - 7
-

        
          

        

      

      
         

      

    

    
      	
               
      

            	
              (4)

            	
              RIGHTS UPON EVENT OF
      DEFAULT.

            

    

     

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

     

    (i)          [reserved]

     

    (ii)         the
suspension from trading (other than a general suspension of trading of all
stocks on the Principal Market) or failure of the Common Stock to be listed on
the Principal Market or on an Eligible Market for a period of five (5)
consecutive Trading Days or for more than an aggregate of five (5) Trading Days
in any 365-day period;

     

    (iii)        the
Company's (A) failure to cure a Conversion Failure by delivery of the required
number of shares of Common Stock within ten (10) Trading Days after the
applicable Conversion Date or (B) notice, written or oral, to any holder of the
Notes, including by way of public announcement or through any of its agents, at
any time, of its intention not to comply with a request for conversion of any
Notes into shares of Common Stock that is tendered in accordance with the
provisions of the Notes;

     

    (iv)        [reserved]

     

    (v)         the
Company's failure to pay to the Holder any amount of Principal (including any
Installment Amount), Interest, Late Charges, Make-Whole Amount or other amounts
when and as due under this Note (including, without limitation, the Company's
failure to pay any redemption amounts hereunder) or any other Transaction
Document (as defined in the Securities Purchase Agreement) or any other
agreement, document, certificate or other instrument delivered in connection
with the transactions contemplated hereby and thereby to which the Holder is a
party, except, (i) in the case of a failure to pay Interest and/or Late Charges
when and as due, in which case only if such failure continues for a period of at
least five (5) Trading Days and (ii) in the case of a failure to pay in full the
amount of cash due pursuant to a Buy-In within seven (7) days after notice
thereof is delivered or a failure to pay liquidated damages due pursuant to the
Transaction Documents within seven (7) days of the date of the request for such
payments;

    
      
         

      

      
        - 8
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    (vi)        the
Company or any Subsidiary defaults in any of its obligations under any other
debenture or any mortgage, credit agreement or other facility, indenture
agreement, factoring agreement or other instrument under which there may be
issued, or by which there may be secured or evidenced, any Indebtedness in
excess of $500,000, whether such Indebtedness now exists or is hereafter
created, and such default results in such Indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable;

     

    (vii)       the
Company or any of its Subsidiaries, pursuant to or within the meaning of Title
11, U.S. Code, or any similar Federal, foreign or state law for the relief of
debtors (collectively, "Bankruptcy Law"), (A)
commences a voluntary case, (B) consents to the entry of an order for relief
against it in an involuntary case, (C) consents to the appointment of a
receiver, trustee, assignee, liquidator or similar official or such appointment
is not discharged or stayed within sixty (60) days (a "Custodian"), (D) makes a
general assignment for the benefit of its creditors or (E) admits in writing
that it is generally unable to pay its debts as they become due or any such
involuntary case is not dismissed within sixty (60) days of
commencement;

     

    (viii)      a
court of competent jurisdiction enters an order or decree under any Bankruptcy
Law that (A) is for relief against the Company or any of its Subsidiaries in an
involuntary case, (B) appoints a Custodian of the Company or any of its
Subsidiaries or (C) orders the liquidation of the Company or any of its
Subsidiaries;

     

    (ix)         a
final judgment or judgments for the payment of money aggregating in excess of
$1,000,000 are rendered against the Company or any of its Subsidiaries and which
judgments are not, within sixty (60) days after the entry thereof, bonded,
discharged or stayed pending appeal, or are not discharged within sixty (60)
days after the expiration of such stay; provided, however, that any judgment
which is covered by insurance or an indemnity from a credit worthy party shall
not be included in calculating the $1,000,000 amount set forth above so long as
the Company provides the Holder a written statement from such insurer or
indemnity provider (which written statement shall be reasonably satisfactory to
the Holder) to the effect that such judgment is covered by insurance or an
indemnity and the Company will receive the proceeds of such insurance or
indemnity within thirty (30) days of the issuance of such judgment;

     

    (x)          other
than as specifically set forth in another clause of this Section 4(a), the
Company breaches any representation, warranty, covenant or other term or
condition of any Transaction Document; provided, however, that in the case of a
breach of a covenant which is curable, only if such breach continues for a
period of at least ten (10) calendar days after the date on which written notice
of such default is first given by the Holder or any holder of Other
Notes;

    
      
         

      

      
        - 9
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    (xi)         any
breach or failure to comply in (A) any material respect with Sections 8 or 9 of
this Note or (B) any respect with Section 14 of this Note or;

     

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

     

    (b)           Redemption
Right.  Promptly after becoming aware of the occurrence of an
Event of Default with respect to this Note or any Other Note, the Company shall
deliver written notice thereof via facsimile and overnight courier (an "Event of Default Notice") to
the Holder.  At any time after the earlier of the Holder's receipt of
an Event of Default Notice and the Holder becoming aware of an Event of Default,
the Holder may require the Company to redeem all or any portion of this Note by
delivering written notice thereof (the "Event of Default Redemption
Notice") to the Company, which Event of Default Redemption Notice shall
indicate the Conversion Amount of this Note the Holder is electing to
redeem.  Each portion of this Note subject to redemption by the
Company pursuant to this Section 4(b) shall be redeemed by the Company at a
price equal to the greater of (i) the product of (x) the Conversion Amount to be
redeemed and (y) the Redemption Premium and (ii) the product of (A) the
Conversion Rate with respect to such Conversion Amount in effect at such time as
the Holder delivers an Event of Default Redemption Notice and (B) the greater of
(1) the Closing Sale Price of the Common Stock on the date immediately preceding
such Event of Default, (2) the Closing Sale Price of the Common Stock on the
date immediately after such Event of Default and (3) 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.  In the event of
a partial redemption of the Note pursuant hereto, the Principal amount redeemed
shall be deducted from the Installment Amounts relating to the applicable
Installment Dates as set forth in the Event of Default Redemption
Notice.  To the extent redemptions required by this Section 4(b) are
deemed or determined by a court of competent jurisdiction to be prepayments of
the Note by the Company, such redemptions shall be deemed to be voluntary
prepayments.  The parties hereto agree that in the event of the
Company's redemption of any portion of the Note under this Section 4(b), the
Holder's damages would be uncertain and difficult to estimate because of the
parties' inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the
Holder.  Accordingly, any 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 AND CHANGE OF CONTROL.

     

    (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 Required Holders and approved by the Required
Holders prior to such Fundamental Transaction, including agreements to deliver
to each holder of Notes in exchange for such Notes a security of the Successor
Entity evidenced by a written instrument substantially similar in form and
substance to the Notes, including, without limitation, having a principal amount
and interest rate equal to the principal amounts and the interest rates of the
Notes held by such holder and having similar ranking to the Notes, and
satisfactory to the Required Holders 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 referring to the "Company" shall refer
instead to the Successor Entity), and may exercise every right and power of the
Company and shall assume all of the obligations of the Company under this Note
with the same effect as if such Successor Entity had been named as the Company
herein.  Upon consummation of the Fundamental Transaction, the
Successor Entity 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 Common
Stock (or other securities, cash, assets or other property) issuable upon the
conversion or redemption of the Notes prior to such Fundamental Transaction,
such shares of publicly traded common stock (or its equivalent) of the Successor
Entity (including its Parent Entity), 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 or redemption of
this Note.

    
      
         

      

      
        - 10
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    (b)           Redemption
Right.  No sooner than fifteen (15) days nor later than ten
(10) days prior to the consummation of a Change of Control, but not prior to the
public announcement of such Change of Control, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a "Change of Control Notice").  At any
time during the period beginning after the Holder's receipt of a Change of
Control Notice and ending on the date of the consummation of such Change of
Control (or, in the event a Change of Control Notice is not delivered at least
ten (10) days prior to a Change of Control, at any time on or after the date
which is ten (10) days prior to a Change of Control and ending ten (10) days
after the consummation of such Change of Control), the Holder may require the
Company to redeem all or any portion of this Note by delivering written notice
thereof ("Change of Control
Redemption Notice") to the Company, which Change of Control Redemption
Notice shall indicate the Conversion Amount the Holder is electing to
redeem.  The portion of this Note subject to redemption pursuant to
this Section 5 shall be redeemed by the Company at a price equal to the greater
of (i) the product of (x) the Conversion Amount being redeemed and (y) the
quotient determined by dividing (A) the Closing Sale Price of the Common Stock
immediately following the public announcement of such proposed Change of Control
by (B) the Conversion Price and (ii) 125% of the Conversion Amount plus accrued
and unpaid Interest thereon being redeemed (the "Change of Control 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 shareholders in connection with a Change of
Control.  Notwithstanding anything to the contrary in this Section 5,
but subject to Section 3(e), until the Change of Control Redemption Price
(together with any interest thereon) is paid in full, the Conversion Amount
submitted for redemption under this Section 5(b) 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 from the Installment Amounts relating to the
applicable Installment Dates as set forth in the Change of Control 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 Change of Control 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.

    
      
         

      

      
        - 11
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    (6)           RIGHTS UPON ISSUANCE OF
PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

     

    (a)           Purchase
Rights.  If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase
Rights"), then the Holder will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which the
Holder could have acquired if the Holder had held the number of shares of Common
Stock acquirable upon complete conversion of this Note (without taking into
account any limitations or restrictions on the convertibility of this Note)
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.

     

    (b)           Other Corporate
Events.  In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a "Corporate
Event"), the Company shall make appropriate provision to insure that the
Holder will thereafter have the right to receive upon a conversion of this Note,
(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  to receive or retain with respect to such shares of Common
Stock had such shares of Common Stock been held by the Holder upon the
consummation of such Corporate Event (without taking into account any
limitations or restrictions on the convertibility of this Note) or (ii) in lieu
of the shares of Common Stock otherwise receivable upon such conversion, such
securities or other assets received by the holders of shares of Common Stock in
connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Note initially been issued
with conversion rights for the form of such consideration (as opposed to shares
of Common Stock) at a conversion rate for such consideration commensurate with
the Conversion Rate.  Provision made pursuant to the preceding
sentence shall be in a form and substance satisfactory to the Required
Holders.  The provisions of this Section shall apply similarly and
equally to successive Corporate Events and shall be applied without regard to
any limitations on the conversion or redemption of this Note.

     

    (7)           RIGHTS UPON ISSUANCE OF
OTHER SECURITIES.

     

    (a)           Adjustment of Conversion
Price upon Issuance of Common Stock.  If and whenever on or
after the Subscription Date and on or prior to the two (2) year anniversary of
the Initial Effective Date (as defined in the Registration Rights Agreement),
the Company issues or sells, or in accordance with this Section 7(a) is deemed
to have issued or sold, any shares of Common Stock (including the issuance or
sale of shares of Common Stock owned or held by or for the account of the
Company, but excluding shares of Common Stock issued or sold or deemed to have
been issued or sold by the Company in connection with any Excluded Security) for
a consideration per share (the "Applicable Price") less than a
price equal to the Conversion Price in effect immediately prior to such issue or
sale (the foregoing a "Dilutive
Issuance"), then immediately after such Dilutive Issuance the Conversion
Price then in effect shall be reduced to the Applicable Price with respect to a
portion of the Principal amount of this Note, with the portion of the Principal
amount that is subject to the adjusted Conversion Price to be determined by
multiplying (i) the then outstanding Principal amount of this Note whose
Conversion Price is greater than the Applicable Price by (ii) the Adjustment
Fraction.  The adjustment of the Conversion Price under this Section
7(a) allows for multiple Conversion Prices to be applicable under this
Note.  Further adjustments shall be made successively for successive
Dilutive Issuances with adjustments to the Conversion Price affecting portions
of the Note with the highest Conversion Price first and then successively to the
portions of the Note with the lowest Conversion Price.  For purposes
of example only, if the then current Conversion Price is $2.50 and the
outstanding Principal is $5,000,000 and the Company issues 1,000,000 shares of
Common Stock at a price of $1.50, then the adjusted Conversion Price of $1.50
will be applied with respect to 50% of the Principal amount of this Note such
that $2,500,000 of the Note will have an adjusted Conversion Price of $1.50 and
the Conversion Price will not be adjusted with respect to the remaining
$2,500,000 of the Note.  If there is a subsequent Dilutive Issuance
where the Company issues 1,000,000 shares of Common Stock at a price of $2.00,
then the adjusted Conversion Price of $2.00 will be applied to all of the
Principal amount with the Conversion Price of $2.50 so that $2,500,000 of the
Note will have an adjusted Conversion Price of $2.00 and $2,500,000 of the Note
will have an adjusted Conversion Price of $1.50.  If there is a third
Dilutive Issuance where the Company issues 333,333 shares of Common Stock at a
price of $1.00, since the $1.00 is lower than each of the existing portions of
the Principal, then the formula will be applied to portion with the higher
Conversion Price first so that the Principal amount that will get the Conversion
Price adjustment to $1.00 will be $666,666 of the $2,500,000 of the Note that
has a Conversion Price of $2.00, such that after such third Dilutive Issuance
(A) $666,666 of the Note will have a Conversion Price of $1.00, (B) $1,833,333
of the Note will have a Conversion Price of $2.00, and (C) $2,500,000 of the
Note will have a Conversion Price of $1.50.  For purposes of
determining the adjusted Conversion Price under this Section 7(a), the following
shall be applicable:

    
      
         

      

      
        - 12
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    (i)           Issuance of
Options.  If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion or exchange or
exercise of any Convertible Securities issuable upon exercise of such Option is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the granting or sale of such Option for such price per share.  For
purposes of this Section 7(a)(i), the "lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Option or upon
conversion or exchange or exercise of any Convertible Securities issuable upon
exercise of such Option" shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon granting or sale of the Option, upon exercise of
the Option and upon conversion or exchange or exercise of any Convertible
Security issuable upon exercise of such Option.  No further adjustment
of the Conversion Price shall be made upon the actual issuance of such share of
Common Stock or of such Convertible Securities upon the exercise of such Options
or upon the actual issuance of such Common Stock upon conversion or exchange or
exercise of such Convertible Securities.

    
      
         

      

      
        - 13
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    (ii)          Issuance of Convertible
Securities.  If the Company in any manner issues or sells any
Convertible Securities and the lowest price per share for which one share of
Common Stock is issuable upon such conversion or exchange or exercise thereof is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the issuance or sale of such Convertible Securities for such price per
share.  For the purposes of this Section 7(a)(ii), the "lowest price
per share for which one share of Common Stock is issuable upon such conversion
or exchange or exercise" shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon the issuance or sale of the Convertible Security
and upon the conversion or exchange or exercise of such Convertible
Security.  No further adjustment of the Conversion Price shall be made
upon the actual issuance of such share of Common Stock upon conversion or
exchange or exercise of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustment of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 7(a), no further adjustment of the Conversion
Price shall be made by reason of such issue or sale.

     

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

     

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

    
      
         

      

      
        - 14
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    (v)          Record
Date.  If the Company takes a record of the holders of Common
Stock for the purpose of entitling them (A) to receive a dividend or other
distribution payable in Common Stock, Options or in Convertible Securities or
(B) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may
be.

     

    (b)           Adjustment of Conversion
Price upon Subdivision or Combination of Common Stock.  If the
Company at any time on or after the Subscription Date subdivides (by any stock
dividend, stock split, recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision will be
proportionately reduced.  If the Company at any time on or after the
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.

     

    (c)           Other
Events.  If any event occurs of the type contemplated by the
provisions of this Section 7 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
Board of Directors will make an appropriate adjustment in the Conversion Price
so as to protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 7.

    
      
         

      

      
        - 15
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    (d)           Voluntary
Decrease.  The Company may at any time during the term of the
Notes reduce the then current Conversion Price for any portion of the Notes (on
a pro rata basis) to any amount and for any period of time deemed appropriate by
the Board of Directors.

     

    (8)           COMPANY INSTALLMENT
CONVERSION OR REDEMPTION.

     

    (a)           General.  On
each applicable Installment Date, the Company shall pay to the Holder of this
Note the Installment Amount due on such date by converting such Installment
Amount, provided that the Equity Conditions have been satisfied (or waived in
writing by the Holder except that the Holders may not waive any Equity Condition
to the extent such waiver would cause the Company to be in violation of the
rules and regulations of the Principal Market), in accordance with this Section
8 (a "Company
Conversion"); provided, however, that the Company may, at its option
following notice to the Holder as set forth below, pay the Installment Amount by
redeeming such Installment Amount in cash (a "Company Installment
Redemption") or by any combination of a Company Conversion and a Company
Installment Redemption so long as all of the outstanding applicable Installment
Amount shall be converted and/or redeemed by the Company on the applicable
Installment Date, subject to the provisions of this Section 8.  On the
date which is the twenty-fourth (24th)
Trading Day prior to each Installment Date (each, an "Installment Notice Due Date"),
the Company shall deliver written notice (each, a "Company Installment Notice"
and the date all of the holders receive such notice is referred to as to "Company Installment Notice
Date"), to each holder which Company Installment Notice shall (i) either
(A) confirm that the applicable Installment Amount of such holder’s Note shall
be converted in whole pursuant to a Company Conversion (such amount to be
converted, the "Company
Conversion Amount") or (B) (1) state that the Company elects to redeem,
in whole or in part, the applicable Installment Amount pursuant to a Company
Installment Redemption and (2) specify the portion which the Company elects to
redeem pursuant to a Company Installment Redemption (such amount to be redeemed,
the "Company Installment
Redemption Amount") and
the portion, if any, that the Company elects to convert pursuant to a Company
Conversion (such amount also a "Company Conversion Amount")
which amounts, when added, together must equal the applicable Installment Amount
and (ii) if the Installment Amount is to be paid, in whole or in part, pursuant
to a Company Conversion, certify that the Equity Conditions have been satisfied
as of the date of the Company Installment Notice.  Each Company
Installment Notice shall be irrevocable.  If the Company does not
timely deliver a Company Installment Notice in accordance with this Section 8,
then the Company shall be deemed to have delivered an irrevocable Company
Installment Notice confirming a Company Conversion and shall be deemed to have
certified that the Equity Conditions in connection with any such conversion have
been satisfied.  Except as expressly provided in this Section 8(a),
the Company shall convert and/or redeem the applicable Installment Amount of
this Note pursuant to this Section 8 and the corresponding Installment Amounts
of the Other Notes pursuant to the corresponding provisions of the Other Notes
in the same ratio of the Installment Amount being redeemed and converted
hereunder.  The Company Conversion Amount (whether set forth in the
Company Installment Notice or by operation of this Section 8) shall be converted
in accordance with Section 8(b) and the Company Redemption Amount shall be
redeemed in accordance with Section 8(c).

    
      
         

      

      
        - 16
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    (b)           Mechanics of Company
Conversion.  Subject to Section 3(e), if the Company delivers a
Company Installment Notice and confirms, or is deemed to have confirmed, in
whole or in part, a Company Conversion in accordance with Section 8(a), then no
later than two (2) Trading Days after delivery of a Company Installment Notice
setting forth a Company Conversion Amount, the Company shall deliver to the
Holder's account with DTC such number of shares of Common Stock (the "Pre-Installment Conversion
Shares") equal to the quotient of (x) such Company Conversion Amount
divided by (y) the Company Pre-Installment Conversion Price.  On the
applicable Installment Date, the Company shall deliver to the Holder's account
with DTC an additional number of shares of Common Stock equal to the Installment
Balance Conversion Shares; provided that the Equity Conditions have been
satisfied (or waived in writing by the Holder) on such Installment
Date.  If the Equity Conditions are not satisfied (or waived in
writing by the Holder) on such Installment Date, then at the option of the
Holder designated in writing to the Company, the Holder may require the Company
to do any one or more of the following: (i) the Company shall redeem all or any
part designated by the Holder of the unconverted Company Conversion Amount (such
designated amount is referred to as the "First Redemption Amount") on
such Installment Date and the Company shall pay to the Holder on such
Installment Date, by wire transfer of immediately available funds, an amount in
cash equal to 125% of such First Redemption Amount, and/or (ii) the Company
Conversion shall be null and void with respect to all or any part designated by
the Holder of the unconverted Company Conversion Amount and the Holder shall be
entitled to all the rights of a holder of this Note with respect to such amount
of the Company Conversion Amount; provided, however, that the Conversion Price
for such unconverted Company Conversion Amount shall thereafter be adjusted to
equal the lesser of (A) the Company Conversion Price as in effect on the date on
which the Holder voided the Company Conversion and (B) the Company Conversion
Price as in effect on the date on which the Holder delivers a Conversion Notice
relating thereto.  If the Company fails to redeem any First Redemption
Amount on or before the applicable Installment Date by payment of such amount on
the applicable Installment Date, then the Holder shall have the rights set forth
in Section 10(a) as if the Company failed to pay the applicable Company
Installment Redemption Price and all other rights under this Note (including,
without limitation, such failure constituting an Event of Default described in
Section 4(a)(v)).  Notwithstanding anything to the contrary in this
Section 8(b), but subject to Section 3(e), until the Company delivers Common
Stock representing the Company Conversion Amount to the Holder, the Company
Conversion Amount may be converted by the Holder into Common Stock pursuant to
Section 3.  In the event that the Holder elects to convert the Company
Conversion Amount prior to the applicable Installment Date as set forth in the
immediately preceding sentence, the Company Conversion Amount so converted shall
be deducted from the Installment Amounts relating to the applicable Installment
Dates as set forth in the applicable Conversion Notice.

     

    (c)           Mechanics of Company
Redemption.  If the Company elects a Company Redemption in
accordance with Section 8(a), then the Company Redemption Amount which is to be
paid to the Holder on the applicable Installment Date shall be redeemed by the
Company and the Company shall pay to the Holder on such Installment Date, by
wire transfer of immediately available funds, an amount in cash (the "Company Installment Redemption
Price") equal to 100% of the Company Installment Redemption
Amount.  If the Company fails to redeem the Company Installment
Redemption Amount on the applicable Installment Date by payment of the Company
Installment Redemption Price on such date, then at the option of the Holder
designated in writing to the Company (any such designation, a "Conversion Notice" for
purposes of this Note), the Holder may require the Company to convert all or any
part of the Company Redemption Amount at the Company Conversion
Price.  Conversions required by this Section 8(c) shall be made in
accordance with the provisions of Section 3(c).  Notwithstanding
anything to the contrary in this Section 8(c), but subject to Section 3(e),
until the Company Installment Redemption Price (together with any interest
thereon) is paid in full, the Company Installment Redemption Amount (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 the Holder
elects to convert all or any portion of the Company Redemption Amount prior to
the applicable Installment Date as set forth in the immediately preceding
sentence, the Company Redemption Amount so converted shall be deducted from the
Installment Amounts relating to the applicable Installment Dates as set forth in
the applicable Conversion Notice.

    
      
         

      

      
        - 17
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    (d)           Pro Rata
Requirement.  If the Company elects to cause a Company
Conversion or Company Installment Redemption pursuant to Section 8, then it must
simultaneously take the same action with respect to the Other
Notes.  If the Company elects to cause a Company Conversion or Company
Installment Redemption pursuant to this Section 8 (or similar provisions under
the Other Notes) with respect to less than all of the principal amount of the
Notes then outstanding, then the Company shall require redemption of a Principal
amount from the Holder and each holder of the Other Notes equal to the product
of i) the aggregate principal amount of Notes which the Company has elected to
cause to be redeemed pursuant to Section 8, multiplied by ii) the fraction, the
numerator of which is the sum of the initial principal amount of Notes purchased
by such holder (or the ultimate holder of a Note transferred as set forth below
with an allocation among such Notes as set forth below) and the denominator of
which is the initial principal amounts of Notes purchased by all holders (or the
ultimate holder of a Note transferred as set forth below with an allocation
among such Notes as set forth below) holding outstanding Notes (such fraction
with respect to each holder is referred to as its "Redemption Allocation
Percentage", and such amount with respect to each holder is referred to
as its "Pro Rata Redemption
Amount"); provided that in the event that the initial holder of any Notes
has sold or otherwise transferred any of such holder's Notes, the transferee
shall be allocated a pro rata portion of such transferring holder's Redemption
Allocation Percentage and Pro Rata Redemption Amount; and provided further, that
in the event any holder's Pro Rata Redemption Amount exceeds the outstanding
principal amount of such holder's Note, any excess redemption amount shall be
applied to the principal amount of all remaining Notes on a pro rata basis
pursuant to this subsection (b).

     

    (9)           OPTIONAL REDEMPTION BY
COMPANY.

     

    (a)           Optional Redemption by the
Company.  At any time after the Issuance Date, the Company
shall have the right, in its sole discretion, to redeem all or any portion of
the Note (a "Company Optional
Redemption").  In order for the Company to exercise the Company
Optional Redemption, the Company shall deliver written notice by confirmed
facsimile and overnight courier to all, but not less than all, of the holders of
the Notes (the "Company
Optional Redemption Notice" and the date such notice is delivered to all
the holders is referred to as the "Company Optional Redemption Notice
Date") no later than twenty (20) Trading Days prior to the Company
Optional Redemption Date (as hereafter defined) which shall (w) state the date
on which the Company Optional Redemption shall occur (such date, the "Company Optional Redemption
Date"), (x) describe the redemption rights provided in this Section 9,
(y) set forth the Optional Redemption Price, and (z) state the aggregate
Principal of the Notes which the Company has elected to be subject to such
Company Optional Redemption from all of the holders of the Notes pursuant to
this Section 9(b) (and analogous provisions under the Other Notes) plus accrued
and unpaid Interest thereon (the "Company Optional Redemption
Amount").  The portion of this Note subject to redemption
pursuant to this Section 9(a) shall be redeemed by the Company in cash at a
price (the "Optional Redemption
Price") equal to 115% of the sum of (x) the Conversion Amount being
redeemed and (y) any accrued and unpaid Interest on the Conversion
Amount.  The Company Optional Redemption Notice shall be
irrevocable.  Notwithstanding anything to the contrary in this Section
9, but subject to Section 3(e), until the Holder receives the Optional
Redemption Price, the Conversion Amount reflected in such Optional Redemption
Notice may be converted, in whole or in part, by the Holder into Common Stock
pursuant to Section 3 (and any such conversions shall be deemed to be a
withdrawal of the Company Optional Redemption Notice to the extent of such
conversion), and any such conversion shall reduce the Conversion Amount
reflected in such Optional Redemption Notice.  The Company Redemption
Amount which is to be paid to the Holder on the applicable Company Optional
Redemption Date shall be redeemed by the Company, and the Company shall pay to
the Holder on such Company Optional Redemption Date by wire transfer of
immediately available funds, the Optional Redemption Price.

    
      
         

      

      
        - 18
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    (b)           Pro Rata Redemption
Requirement.  If the Company elects to cause a Company Optional
Redemption pursuant to Section 9, then it must simultaneously take the same
action with respect to the Other Notes.  If the Company elects to
cause a Company Optional Redemption pursuant to this Section 9 (or similar
provisions under the Other Notes) with respect to less than all of the principal
amount of the Notes then outstanding, then the Company shall require redemption
of a Principal amount from the Holder and each holder of the Other Notes equal
to the product of iii) the aggregate principal amount of Notes which the Company
has elected to cause to be redeemed pursuant to Section 9, multiplied by iv)
such holder's Redemption Allocation Percentage; provided that in the event that
the initial holder of any Notes has sold or otherwise transferred any of such
holder's Notes, the transferee shall be allocated a pro rata portion of such
transferring holder's Redemption Allocation Percentage and Pro Rata Redemption
Amount; and provided further, that in the event any holder's Pro Rata Redemption
Amount exceeds the outstanding principal amount of such holder's Note, any
excess redemption amount shall be applied to the principal amount of all
remaining Notes on a pro rata basis pursuant to this subsection
(b).

     

    (c)           Redemptions
Generally.  Any redemptions made pursuant to this Section 9
shall be made in accordance with Section 10.  No later than one (1)
Trading Day following any Company Optional Redemption Date, the Company shall
file a Current Report on Form 8-K describing the terms of such Company Optional
Redemption Date. To the extent redemptions required by this Section 9 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.

    
      
         

      

      
        - 19
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    (10)          REDEMPTIONS.

     

    (a)           Mechanics.  The
Company shall deliver the applicable Event of Default Redemption Price to the
Holder within five (5) Business Days after the Company's receipt of the Holder's
Event of Default Redemption Notice.  If the Holder has submitted a
Change of Control Redemption Notice in accordance with Section 5(b), the Company
shall deliver the applicable Change of Control Redemption Price to the Holder
concurrently with the consummation of such Change of Control if such notice is
received prior to the consummation of such Change of Control 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 18(d))
representing the outstanding Principal which has not been
redeemed.  In the event that the Company does not pay the Redemption
Price to the Holder within the time period required, at any time thereafter and
until the Company pays such unpaid Redemption Price in full, the Holder shall
have the option, in lieu of redemption, to require the Company to promptly
return to the Holder all or any portion of this Note representing the Conversion
Amount that was submitted for redemption and for which the applicable Redemption
Price has not been paid.  Upon the Company's receipt of such notice,
(x) the Redemption Notice shall be null and void with respect to such Conversion
Amount and (y) the Company shall immediately return this Note, or issue a new
Note (in accordance with Section 18(d)) to the Holder representing such
Conversion Amount.

     

    (b)           Redemption by Other
Holders.  Upon the Company's receipt of notice from any of the
holders of the Other Notes for redemption or repayment as a result of an event
or occurrence substantially similar to the events or occurrences described in
Section 4(b) or Section 5(b) (each, an "Other Redemption Notice"), the
Company shall immediately forward to each Holder by facsimile a copy of such
notice.  If the Company receives a Redemption Notice and one or more
Other Redemption Notices, during the period beginning on and including the date
which is three (3) Business Days prior to the Company's receipt of the Holder's
Redemption Notice and ending on and including the date which is three (3)
Business Days after the Company's receipt of the Holder's Redemption Notice and
the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received
during such seven (7) Business Day period, then the Company shall redeem a pro
rata amount from each holder of the Notes (including the Holder) based on the
principal amount of the Notes submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven Business Day period.

     

    (11)           RESERVATION OF AUTHORIZED
SHARES.

     

    (a)           Reservation.  The
Company initially shall reserve out of its authorized and unissued Common Stock
a number of shares of Common Stock for each of the Notes equal to 130% of the
Conversion Rate with respect to the Conversion Amount of each such Note as of
the Issuance Date.  So long
as any of the Notes are outstanding, the Company shall take all action necessary
to reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Principal and
Make-Whole Amounts and amortization of the Notes, 130% 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 and the maximum number of shares of Common
Stock issuable as a Make-Whole Amount upon conversion of all outstanding Notes;
provided that at no time shall the number of shares of Common Stock so reserved
be less than the number of shares required to be reserved by the previous
sentence (without regard to any limitations on conversions) (the "Required Reserve
Amount").  The initial number of shares of Common Stock
reserved for conversions of the Notes and each increase in the number of shares
so reserved shall be allocated pro rata among the holders of the Notes based on
the principal amount of the Notes held by each holder at the Closing (as defined
in the Securities Purchase Agreement) or increase in the number of reserved
shares, as the case may be (the "Authorized Share
Allocation").  In the event that a holder shall sell or
otherwise transfer any of such holder's Notes, each transferee shall be
allocated a pro rata portion of such holder's Authorized Share
Allocation.  Any shares of Common Stock reserved and allocated to any
Person which ceases to hold any Notes shall be allocated to the remaining
holders of Notes, pro rata based on the principal amount of the Notes then held
by such holders.

    
      
         

      

      
        - 20
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    (b)           Insufficient Authorized
Shares.  If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an "Authorized Share Failure"),
then the Company shall immediately take all reasonable best 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 shareholders 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 shareholder with a proxy statement and shall use its best
efforts to solicit its shareholders' approval of such increase in authorized
shares of Common Stock and to cause its board of directors to recommend to the
shareholders that they approve such proposal.

     

    (12)           RESTRICTION ON REDEMPTION
AND CASH DIVIDENDS.  Until all of the Notes have been
converted, redeemed or otherwise satisfied in accordance with their terms, the
Company shall not, directly or indirectly, redeem, repurchase or declare or pay
any cash dividend or distribution on its capital stock without the prior express
written consent of the Required Holders.

     

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

     

    (14)           COVENANTS.

     

    (a)           Rank.  All
payments due under this Note (i) shall rank pari passu with all Other
Notes, and (ii) shall be senior to all other Indebtedness of the Company other
than Indebtedness described in clauses (ii), (iii), (iv), (v) and (vi) of the
definition of Permitted Indebtedness.

    
      
         

      

      
        - 21
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    (b)           Restricted
Actions.  The Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, take (or agree to
take) any Restricted Action.

     

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

     

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

     

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

     

    (18)           REISSUANCE OF THIS
NOTE.

     

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

     

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

     

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

     

    
      
        
        

      

      
        - 22
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    (d)           Issuance of New
Notes.  Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor
with this Note, (ii) shall represent, as indicated on the face of such new Note,
the Principal remaining outstanding (or in the case of a new Note being issued
pursuant to Section 18(a) or Section 18(c), the Principal designated by the
Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent unpaid accrued
Interest and Late Charges, if any, on the Principal and Interest of this Note,
from the Issuance Date.

     

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

     

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

     

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

    
      
         

      

      
        - 23
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    (22)           FAILURE OR INDULGENCE NOT
WAIVER.  No failure or delay on the part of the Holder in the
exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power, right or
privilege preclude other or further exercise thereof or of any other right,
power or privilege.

     

    (23)           DISPUTE
RESOLUTION.  In the case of a dispute as to the determination
of the Closing Bid Price, the Closing Sale Price or the Weighted Average Price
or the arithmetic calculation of the Conversion Rate, the Conversion Price or
any Redemption Price, the Company shall submit the disputed determinations or
arithmetic calculations via facsimile within one (1) Business Day of receipt of
the Conversion Notice or Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder.  If the Holder and the
Company are unable to agree upon such determination or calculation within one
(1) Business Day of such disputed determination or arithmetic calculation being
submitted to the Holder, then the Company shall, within one (1) Business Day
submit via facsimile (a) the disputed determination of the Closing Bid Price,
the Closing Sale Price or the Weighted Average Price to an independent,
reputable investment bank selected by the Company and approved by the Holder or
(b) the disputed arithmetic calculation of the Conversion Rate, Conversion Price
or the Redemption Price to the Company's independent, outside
accountant.  The Company, at the Company's expense, shall cause the
investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than five (5) Business Days from the time it receives the
disputed determinations or calculations.  Such investment bank's or
accountant's determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.

     

    (24)           NOTICES; PAYMENTS;
TAXES.

     

    (a)           Notices.  Whenever
notice is required to be given under this Note, unless otherwise provided
herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement.  The Company shall provide the Holder
with prompt written notice of all actions taken pursuant to this Note, including
in reasonable detail a description of such action and the reason
therefore.  Without limiting the generality of the foregoing, the
Company will give written notice to the Holder (i) immediately upon any
adjustment of the Conversion Price, setting forth in reasonable detail, and
certifying, the calculation of such adjustment and (ii) at least ten (10) days
prior to the date on which the Company closes its books or takes a record (A)
with respect to any dividend or distribution upon the Common Stock, (B) with
respect to any pro rata subscription offer to holders of Common Stock or (C) for
determining rights to vote with respect to any Fundamental Transaction,
dissolution or liquidation, provided in each case that such information shall be
made known to the public prior to or in conjunction with such notice being
provided to the Holder.

     

    (b)           Payments.  Whenever
any payment of cash is to be made by the Company to any Person pursuant to this
Note, such payment shall be made in lawful money of the United States of America
by 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; provided that the Holder may elect to receive a payment via a
check drawn on the account of the Company and sent via overnight courier service
to the Holder at such address as previously provided to the Company in writing
(which address, in the case of each of the Purchasers, shall initially be as set
forth on the Schedule of Buyers attached to the Securities Purchase
Agreement).  Whenever any amount expressed to be due or payable by the
terms of this Note is due or payable on any day which is not a Business Day, the
same shall instead be due or payable 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 eighteen percent (18%) per annum from the date such amount
was due until the same is paid in full ("Late
Charge").

    
      
         

      

      
        - 24
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    (c)           Taxes.  v) Any and all payments by
the Company hereunder, including any amounts received on a conversion or
redemption of the Note and any amounts on account of interest or deemed
interest, shall be made free and clear of and without deduction for any and all
present or future taxes, levies, imposts, deductions, charges or withholdings,
and all liabilities with respect thereto, excluding taxes imposed on net income
or franchise taxes of the Holder by the jurisdiction in which such person is
organized or has its principal office (all such non-excluded taxes, levies,
imposts, deductions, charges withholdings and liabilities, collectively or
individually, "Taxes").  If the
Company shall be required to deduct any Taxes from or in respect of any sum
payable hereunder to the Holder, (i) except as required by law the sum payable
shall be increased by the amount (an "additional amount") necessary
so that after making all required deductions (including deductions applicable to
additional sums payable under this Section 24(c)) the Holder shall receive an
amount equal to the sum it would have received had no such deductions been made,
(ii) the Company shall make such deductions and (iii) the Company shall pay the
full amount deducted to the relevant governmental authority in accordance with
applicable law.

     

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

     

    (iii)         The
obligations of the Company under this Section 24(c) shall survive the
termination of this Note and the payment of the Note and all other amounts
payable hereunder.

     

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

     

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

    
      
         

      

      
        - 25
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    (27)          GOVERNING LAW; JURISDICTION;
JURY.  This Note shall be construed and enforced in
accor­dance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of New York, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York.  The 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.  The Company hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address as provided in
Section 24 hereof and agrees that such service shall constitute good and
sufficient service of process and notice thereof.  Nothing contained
herein shall be deemed or operate to preclude the Holder from bringing suit or
taking other legal action against the Company in any other jurisdiction to
collect on the Company's obligations to the Holder, or to enforce a judgment or
other court ruling in favor of the Holder.  EACH OF THE COMPANY AND THE HOLDER 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.

     

    (28)          SEVERABILITY. If any
provision of this Note is prohibited by law or otherwise determined to be
invalid or unenforceable by a court of competent jurisdiction, the provision
that would otherwise be prohibited, invalid or unenforceable shall be deemed
amended to apply to the broadest extent that it would be valid and enforceable,
and the invalidity or unenforceability of such provision shall not affect the
validity of the remaining provisions of this Note so long as this Note as so
modified continues to express, without material change, the original intentions
of the parties as to the subject matter hereof and the prohibited nature,
invalidity or unenforceability of the provision(s) in question does not
substantially impair the respective expectations or reciprocal obligations of
the parties or the practical realization of the benefits that would otherwise be
conferred upon the parties.  The parties will endeavor in good faith
negotiations to replace the prohibited, invalid or unenforceable provision(s)
with a valid provision(s), the effect of which comes as close as possible to
that of the prohibited, invalid or unenforceable provision(s).

     

    (29)          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.

    
      
         

      

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

     

    (a)           "Additional Make-Whole Conversion
Price" means, as of any date of determination, that price which shall be
the lower of (i) the price computed as 92% of the arithmetic average of the
Designated Prices and (ii) the applicable Conversion Price.  All such
determinations to be appropriately adjusted for any stock split, stock dividend,
stock combination or other similar transaction that proportionately decreases or
increases the Common Stock during such Additional Make-Whole Measuring
Period.

     

    (b)           "Adjustment Fraction" means a
fraction, the numerator of which is the number of shares of Common Stock issued
or issuable in the Dilutive Issuance and the denominator of which is the number
of shares of Common Stock issuable upon conversion of the Principal amount whose
then current Conversion Price is greater than the Applicable Price.

     

    (c)           "Affiliate" means any Person
that, directly or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with a Person, as such terms are used
in and construed under Rule 144 under the Securities Act.

     

    (d)           "Approved Stock Plan" means any
employee benefit plan which has been approved by the Board of Directors of the
Company, pursuant to which the Company's securities may be issued to any
employee, officer, director or consultant for services provided to the
Company.

     

    (e)           "Bloomberg" means Bloomberg
Financial Markets.

     

    (f)           "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 or executive order to remain
closed.

     

    (g)           "Change of Control" means any
Fundamental Transaction other than (A) any reorganization, recapitalization or
reclassification of the Common Stock in which holders of the Company's voting
power immediately prior to such reorganization, recapitalization or
reclassification continue after such reorganization, recapitalization or
reclassification to hold publicly traded securities and, directly or indirectly,
the voting power of the surviving entity or entities necessary to elect a
majority of the members of the board of directors (or their equivalent if other
than a corporation) of such entity or entities, or (B) pursuant to a migratory
merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company.

     

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

    
      
         

      

      
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    (i)         
  "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.

     

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

     

    (k)           "Company Conversion Price"
means the lowest of (i) the Company Pre-Installment Conversion Price, (ii) the
Company Post-Installment Conversion Price and (iii) the Conversion
Price.

     

    (l)        
   "Company
Post-Installment Conversion Price" means, as of any date of
determination, that price which shall be the lower of (i) the price computed as
92% of the arithmetic average of the Designated Prices and (ii) the applicable
Conversion Price.  All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other similar
transaction that proportionately decreases or increases the Common Stock during
such Company Post-Installment Conversion Measuring Period.

     

    (m)          "Company Pre-Installment Conversion
Price" means, as of any date of determination, that price which shall be
the lower of (i) the price computed as 92% of the arithmetic average of the
Designated Prices and (ii) the applicable Conversion Price.  All such
determinations to be appropriately adjusted for any stock split, stock dividend,
stock combination or other similar transaction that proportionately decreases or
increases the Common Stock during such Company Pre-Installment Conversion
Measuring Period.

     

    (n)           "Contingent Obligation" means,
as to any Person, any direct or indirect liability or guaranty, contingent or
otherwise, of that Person with respect to any indebtedness, lease, dividend or
other obligation of another Person if the primary purpose or intent of the
Person incurring such liability, or the primary effect thereof, is to provide
assurance to the obligee of such liability that such liability will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such liability will be protected (in whole or in part)
against loss with respect thereto.

    
      
         

      

      
        - 28
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    (o)           "Convertible Securities" means
any stock or securities (other than Options) directly or indirectly convertible
into or exercisable or exchangeable for Common Stock.

     

    (p)           "Conversion Share Ratio" means
as to any applicable Installment Date, the quotient of (x) the number of
Pre-Installment Conversion Shares delivered in connection with such Installment
Date divided by (y) the number of Post-Installment Conversion Shares applicable
to such Installment Date.

     

    (q)           "Conversion Shares" means the
number of shares of Common Stock issued or issuable pursuant to this Note,
including, without limitation, the Make-Whole Shares and Installment Conversion
Shares.

     

    (r)      
     "Designated Prices" means, (i)
with respect to any Additional Make-Whole Conversion Price, each of the Weighted
Average Price of the Common Stock of each of the seventeen (17) Trading Days
selected by the Holder during the twenty (20) consecutive Trading Day period
beginning on the third (3rd) Trading Day immediately following the Conversion
Date (the "Additional
Make-Whole Measuring Period"), (ii) with respect to any Initial
Make-Whole Conversion Price, each of the Weighted Average Prices of the Common
Stock for each of the seventeen (17) Trading Days selected by the Holder during
the twenty (20) consecutive Trading Day period ending two (2) Trading Days prior
to the applicable Conversion Date (the "Initial Make-Whole Measuring
Period"), (iii) with respect to any Company Post-Installment Conversion
Price, each of the Weighted Average Prices of the Common Stock for each of the
seventeen (17) Trading Days selected by the Holder during the twenty (20)
consecutive Trading Day period ending two (2) Trading Days prior to the
applicable Installment Date (each, a "Company Post-Installment Conversion
Measuring Period"), and (iv) respect to any Company Pre-Installment
Conversion Price, each of the Weighted Average Prices of the Common Stock for
each of the seventeen (17) Trading Days selected by the Holder during the twenty
(20) consecutive Trading Day period ending twenty-four (24) Trading Days prior
to the applicable Installment Date (each, a "Company Pre-Installment Conversion
Measuring Period"); provided, that the seventeen (17) Trading Days
selected by the Holder shall be designated in a written notice to the Company
prior to the Trading Day immediately following the end of the applicable
measuring period; and provided, further, that in the event that the Holder fails
to deliver the written notice as provided hereunder, the Holder shall be deemed
to have delivered the written notice selecting the Weighted Average Prices
corresponding to the lowest seventeen (17) Trading Days in the applicable
measuring period.

     

    (s)           "Distribution" means, with
respect to any Person, the declaration or payment of any dividends by such
Person, or the purchase, redemption, retirement or other acquisition for value
of any of its capital stock or other equity now or hereafter outstanding, or the
making of any distribution of assets to its stockholders as such whether in
cash, assets or in obligations of such Person, or the allocation or other
setting apart of any sum for the payment of any dividend or distribution on, or
for the purchase, redemption, retirement or other acquisition of any shares of
its capital stock, or the making of any other distribution by reduction of
capital or otherwise in respect of any shares of its capital
stock.

    
      
         

      

      
        - 29
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    (t)           "Eligible Market" means the
Principal Market, The New York Stock Exchange, Inc., the American Stock
Exchange, The NASDAQ Capital Market, The NASDAQ Global Select Market or the OTC
Bulletin Board.

     

    (u)           "Equity Conditions"
means:  (i) on each day during the period beginning twenty (20)
Trading Days prior to the applicable date of determination and ending on and
including the applicable date of determination (each, an "Equity Conditions Measuring
Period"), either (x) the Registration Statement filed pursuant to the
Registration Rights Agreement shall be effective and available for the resale of
all Registrable Securities required to be covered thereby in accordance with the
terms of the Registration Rights Agreement and no Event (as defined in the
Registration Rights Agreement) shall have occurred and be continuing or (y) all
shares of Common Stock issuable upon conversion of the Notes shall be eligible
for sale without restriction and without the need for registration under any
applicable federal or state securities laws; (ii) on each day during the Equity
Conditions Measuring Period, the Common Stock is designated for quotation on an
Eligible Market and shall not have been suspended from trading on such exchange
or market (other than suspensions of not more than two days and occurring prior
to the applicable date of determination due to business announcements by the
Company) nor shall delisting or suspension by such exchange or market been
threatened or pending either (A) in writing by such exchange or market (other
than a notice from the Principal Market to the effect that the common stock does
not satisfy Nasdaq Marketplace Rule 4310(c)(4) (the "Minimum Bid Price Rule"), and
that in accordance with the rules of the Principal Market, the Company will be
provided 180 calendar days to regain compliance with the Minimum Bid Price Rule
or be delisted from the Principal Market) or (B) by falling below the minimum
listing maintenance requirements of all such Eligible Markets; (iii) during the
one (1) year period ending on and including the date immediately preceding the
applicable date of determination, the Company shall have delivered Conversion
Shares upon conversion of the Notes to the holders on a timely basis as set
forth in Section 3(c)(ii) hereof (and analogous provisions under the Other
Notes); (iv) any applicable shares of Common Stock to be issued in connection
with the event requiring determination may be issued in full without violating
Section 3(e) hereof and the rules or regulations of the Principal Market; (v)
during the Equity Conditions Measuring Period, the Company shall not have failed
to timely make any payments within five (5) Business Days of when such payment
is due pursuant to any Transaction Document; (vi) during the Equity Conditions
Measuring Period, there shall not have occurred either (A) the public
announcement of a pending, proposed or intended Fundamental Transaction which
has not been abandoned, terminated or consummated or (B) an Event of Default or
an event that with the passage of time or giving of notice would constitute an
Event of Default; (vii) the Company shall have no knowledge of any fact that
would cause (x) the Registration Statements required pursuant to the
Registration Rights Agreement not to be effective and available for the resale
of all remaining Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) any shares of Common Stock issuable upon
conversion of the Notes not to be eligible for sale without restriction pursuant
to Rule 144 and any applicable federal and state securities laws; (viii) the
Stockholder Approval (as defined in the Securities Purchase Agreement) shall
have been obtained; and (ix) the Company otherwise shall have been in material
compliance with and shall not have materially breached any provision, covenant,
representation or warranty of any Transaction Document.

    
      
         

      

      
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    (v)           "Equity Conditions Failure"
means that (i) on any day during the period commencing twenty (20) Trading Days
prior to the applicable Company Installment Notice Date through the applicable
Installment Date or (ii) on any day during the period commencing ten (10)
Trading Days prior to the applicable Conversion Date through the applicable
Make-Whole Settlement Date, the Equity Conditions have not been satisfied (or
waived in writing by the Holder).

     

    (w)          "Excluded Securities" means any
Common Stock issued or issuable: (i) in connection with any Approved Stock Plan;
(ii) as Conversion Shares; (iii) 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 (other than pursuant to the terms of such Options or Convertible Securities
as in existence on the Subscription Date), (iv) in connection with a strategic
partnership or a joint venture, the primary purpose of which is not to raise
equity capital, and (v) as consideration to the sellers (whether through an
acquisition of stock or a merger of any business, assets or technologies) of any
business, assets or technologies that are strategic to the Company and the
primary purpose of which is not to raise equity capital.

     

    (x)           "Fundamental Transaction" means
that the Company shall, directly or indirectly, in one or more related
transactions, (i) consolidate or merge with or into (whether or not the Company
is the surviving corporation) another Person or Persons, or (ii) sell, assign,
transfer, convey or otherwise dispose of all or substantially all of the
properties or assets of the Company to another Person, or (iii) allow another
Person to make a purchase, tender or exchange offer that is accepted by the
holders of more than 50% of the outstanding shares of Voting Stock (not
including any shares of Voting Stock held by the Person or Persons making or
party to, or associated or affiliated with the Persons making or party to, such
purchase, tender or exchange offer), or (iv) consummate a stock purchase
agreement or other business combination (including, without limitation, a
reorganization, recapitalization, spin-off or scheme of arrangement) with
another Person whereby such other Person acquires more than the 50% of the
outstanding shares of Voting Stock (not including any shares of Voting Stock
held by the other Person or other Persons making or party to, or associated or
affiliated with the other Persons making or party to, such stock purchase
agreement or other business combination), or (v) reorganize, recapitalize or
reclassify its Common Stock or (vi) any "person" or "group" (as these terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or shall
become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of 50% of the aggregate Voting Stock of the
Company.

     

    (y)           "GAAP" means United States
generally accepted accounting principles, consistently applied.

     

    (z)           "Indebtedness" of any Person
means, without duplication (A) all indebtedness for borrowed money, (B) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services, (C) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (D) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (E) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (F) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (G) off-balance sheet liabilities retained in
connection with asset securitization programs, synthetic leases, sale and
leaseback transactions or other similar obligations arising with respect to any
other transaction which is the functional equivalent of or takes the place of
borrowing but which does not constitute a liability on the consolidated balance
sheet of such Person and its subsidiaries, and (H) all indebtedness referred to
in clauses (A) through (G) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien upon or in any property or assets (including accounts and contract
rights) owned by any Person, even though the Person which owns such assets or
property has not assumed or become liable for the payment of such indebtedness,
and (I) all Contingent Obligations in respect of indebtedness or obligations of
others of the kinds referred to in clauses (A) through (H)
above.

    
      
         

      

      
        - 31
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    (aa)         "Initial Make-Whole Conversion
Price" means, as of any date of determination, that price which shall be
the lower of (i) the price computed as 92% of the arithmetic average of the
Designated Prices and (ii) the applicable Conversion Price.  All such
determinations to be appropriately adjusted for any stock split, stock dividend,
stock combination or other similar transaction that proportionately decreases or
increases the Common Stock during such Initial Make-Whole Measuring
Period.

     

    (bb)        "Installment Amount" means,
with respect to any Installment Date, the lesser of (i) 1/11th of the
Original Principal Amount of this Note and (ii) the Principal amount outstanding
under this Note as of such Installment Date, as any such Installment Amount may
be reduced pursuant to the terms of this Note, whether upon conversion,
redemption or otherwise.

     

    (cc)         "Installment Balance Conversion
Shares" means, for any Installment Date, a number of shares of Common
Stock equal to (i) the Post-Installment Conversion Shares for such date minus
(ii) the amount of any Pre-Installment Conversion Shares delivered before or on
such date; provided that in the event that the amount of Pre-Installment
Conversion Shares exceeds the Post-Installment Conversion Shares for such date,
the Installment Balance Conversion Shares shall equal zero (0).

     

    (dd)        "Installment Date" means each
of the following dates: February 15, 2009, May 15, 2009, August 15, 2009,
November 15, 2009, February 15, 2010, May 15, 2010, August 15, 2010, November
15, 2010, February 15, 2011, May 15, 2011 and August 15, 2011.

    
      
         

      

      
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    (ee)         "Installment Period" means the
period from the Installment Notice Due Date until the applicable Installment
Date.

     

    (ff)          "Interest Rate" means ten percent
(10.0%) per annum, subject to adjustment as set forth in Section 2.

     

    (gg)        "Lien" means any mortgage,
lien, pledge, charge, security interest or other encumbrance.

     

    (hh)        "Make-Whole Amount" means, as
to any Conversion Amount being converted pursuant to Section 3 hereof, an amount
equal to the amount of Interest that, but for the applicable conversion, would
have been paid to the Holder on such Conversion Amount from the applicable
Conversion Date with respect to such Conversion Amount through the Maturity
Date; provided, however, that in no event will the Make-Whole Amount exceed an
amount of Interest in excess of twenty-one (21) months of Interest on such
Conversion Amount.

     

    (ii)           "Make-Whole Balance Shares"
means, for any Make-Whole Settlement Date, a number of shares of Common Stock
equal to (i) the Post-Conversion Make-Whole Shares for such date minus
(ii) the amount of any Initial Make-Whole Shares delivered on the applicable
Share Delivery Date; provided that in the event that the amount of Initial
Make-Whole Shares exceeds the Post-Conversion Make-Whole Shares for such date,
the Make-Whole Balance Shares shall equal zero (0).

     

    (jj)           "Make-Whole Shares" means the
Initial Make-Whole Shares and the Make-Whole Balance Shares.

     

    (kk)         "Options" means any rights,
warrants or options to subscribe for or purchase Common Stock or Convertible
Securities.

     

    (ll)           "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.

     

    (mm)       "Permitted Indebtedness" means
(i) Indebtedness incurred by the Company that is made expressly subordinate in
right of payment to the Indebtedness evidenced by this Note, as reflected in a
written agreement acceptable to the Required Holders and approved by the
Required Holders in writing, and which Indebtedness does not provide at any time
for (1) the payment, prepayment, repayment, repurchase or defeasance, directly
or indirectly, of any principal or premium, if any, thereon until ninety-one
(91) days after the Maturity Date or later and (2) total interest and fees at a
rate in excess of ten percent (10.0%) per annum, (ii) Indebtedness secured by
Permitted Liens, (iii) Indebtedness to trade creditors incurred in the ordinary
course of business consistent with past practice and not outstanding for more
than 120 days after the date such payable was created, (iv) extensions,
refinancings and renewals of any items described in clauses (i) through (iii)
hereof, provided that the principal amount is not increased or the terms
modified to impose more burdensome terms upon the Company or its Subsidiary, as
the case may be, (v) the Indebtedness incurred under the Senior Credit Facility
and (vi) the Letter of Credit (as defined in the Securities Purchase
Agreement).

    
      
         

      

      
        - 33
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    (nn)        "Permitted Liens" means (i) any
Lien for taxes not yet due or delinquent or being contested in good faith by
appropriate proceedings for which adequate reserves have been established in
accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a liability that is not yet due or
delinquent, (iii) any Lien created by operation of law, such as materialmen's
liens, mechanics' liens and other similar liens, arising in the ordinary course
of business with respect to a liability that is not yet due or delinquent or
that are being contested in good faith by appropriate proceedings, (iv) Liens
securing the Company's obligations under the Senior Credit Facility, (v) 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, (vi) Liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by Liens of the type described in clause (iv) or (v) above, provided
that any extension, renewal or replacement Lien shall be limited to the property
encumbered by the existing Lien and the principal amount of the Indebtedness
being extended, renewed or refinanced does not increase, (vii) leases or
subleases and licenses and sublicenses granted to others in the ordinary course
of the Company's business, not interfering in any material respect with the
business of the Company and its Subsidiaries taken as a whole, and (viii) Liens
in favor of customs and revenue authorities arising as a matter of law to secure
payments of custom duties in connection with the importation of
goods.

     

    (oo)        "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.

     

    (pp)        "Post-Conversion Make-Whole
Shares" with respect to any conversion, means a number of shares of
Common Stock equal to the applicable Company Make-Whole Conversion Amount for
such Conversion Date divided
by the Additional Make-Whole Conversion Price (without taking into
account the delivery of any Initial Make-Whole Shares).

     

    (qq)        "Post-Installment Conversion
Shares" means, for any Installment Date, that number of shares of Common
Stock equal to the applicable Company Conversion Amount for such Installment
Date divided
by the Company Post-Installment Conversion Price (without taking into
account the delivery of any Pre-Installment Conversion Shares).

     

    (rr)          "Principal Market" means The
NASDAQ Global Market.

     

    (ss)    
    "Redemption Notice" means each of the
Event of Default Redemption Notice, the Change of Control Redemption Notice, any
Company Installment Notice electing a Company Installment Redemption, any
Company Optional Redemption Notice electing a Company Optional Redemption and
any Make-Whole Election electing a Company Make-Whole Redemption (collectively
the "Redemption
Notices").

    
      
         

      

      
        - 34
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    (tt)           "Redemption Premium" means (i)
in the case of the Events of Default described in Section 4(a)(i) - (vi) and
(ix) - (xii), 125% or (ii) in the case of the Events of Default described in
Section 4(a)(vii) - (viii), 100%.

     

    (uu)         "Redemption Price" means each
of the Event of Default Redemption Price, the Change of Control Redemption
Price, the Company Installment Redemption Price, the Company Optional Redemption
Price and the Company Make-Whole Redemption Amount (collectively, the "Redemption
Prices").

     

    (vv)         "Registration Rights Agreement"
means that certain registration rights agreement between the Company and the
initial holders of the Notes relating to, among other things, the registration
of the resale of the Common Stock issuable upon conversion of the
Notes.

     

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

     

    (xx)          "Restricted Actions" means any
of the following actions:

     

    (i)           incur
or guarantee, assume or suffer to exist any Indebtedness, other than (A) the
Indebtedness evidenced by this Note and the Other Notes and (B) Permitted
Indebtedness;

     

    (ii)          allow
or suffer to exist any Lien upon or in any property or assets (including
accounts and contract rights) owned by the Company or any of its Subsidiaries
other than Permitted Liens;

     

    (iii)         create,
incur, assume or suffer to exist any obligation as lessee for the rental or hire
of any Property, except (A) leases existing on the Issuance Date, and any
extensions, supplements, replacements or renewals thereof and (B) leases not to
exceed $50,000 in the aggregate;

     

    (iv)         redeem,
defease, repurchase, repay or make any payments in respect of, by the payment of
cash or cash equivalents (in whole or in part, whether by way of open market
purchases, tender offers, private transactions or otherwise), all or any portion
of any Permitted Indebtedness, whether by way of payment in respect of principal
of (or premium, if any) or interest on, such Indebtedness if at the time such
payment is due or is otherwise made or, after giving effect to such payment, an
event constituting, or that with the passage of time and without being cured
would constitute, an Event of Default has occurred and is
continuing;

     

    (v)          make
any loan or advance to any Person (other than travel advances to employees
incurred in the ordinary course of business) or any purchase or other
acquisition of any capital stock, assets, obligations or other securities of any
Person, or any capital contribution to, investment in, or other acquisition of
any interest in, any Person;

    
      
         

      

      
        - 35
-

        
          

        

      

      
         

      

    

    (vi)        make
any Distribution, except that any Subsidiary may make Distributions to the
Company or any other Person who wholly owns such Subsidiary;

     

    (vii)       enter
into any agreement with respect to any of the foregoing provisions (i) through
(vi).

     

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

     

    (zz)          "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.

     

    (aaa)       "Senior Credit Facility" means
Indebtedness in favor of a commercial bank in the business of lending money;
provided, however, that the aggregate Indebtedness incurred hereunder shall not
exceed $15,000,000 outstanding at any time and any increases to an existing
Senior Credit Facility or new Senior Credit Facility shall be on terms and in
form substantially similar to the Company’s existing Senior Credit
Facility.

     

    (bbb)      "Subscription Date" means
August 14, 2008

     

    (ccc)       "Subsidiary" means, in respect
of any Person, (a) any corporation, association or other business entity of
which 50% or more of the total voting power of shares of capital stock or other
equity interest entitled (without regard to the occurrence of any contingency)
to vote in the election of directors, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by such Person or one or more
of the other subsidiaries of that Person (or a combination thereof) and (b) any
partnership (i) the sole general partner or managing general partner of which is
such Person or a subsidiary of such Person or (ii) the only general partners of
which are (a) such Person or (b) one or more subsidiaries of such Person (or any
combination thereof).

     

    (ddd)      "Successor Entity" means the
Person, which may be the Company, formed by, resulting from or surviving any
Fundamental Transaction or the Person with which such Fundamental Transaction
shall have been made, provided that if such Person is not a publicly traded
entity whose common stock or equivalent equity security is quoted or listed for
trading on an Eligible Market, Successor Entity shall mean such Person's Parent
Entity.

     

    (eee)       "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).

    
      
         

      

      
        - 36
-

        
          

        

      

      
         

      

    

    (fff)         "Voting Stock" of a Person
means capital stock of such Person of the class or classes pursuant to which the
holders thereof have the general voting power to elect, or the general power to
appoint, at least a majority of the board of directors, managers or trustees of
such Person (irrespective of whether or not at the time capital stock of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency).

     

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

     

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

     

    [Signature
Page Follows]

    
      
         

      

      
        - 37
-

        
          

        

      

      
         

      

    

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

     

    
    

     

    
      	 	
              AROTECH
      CORPORATION

            
	 	 	 
	 	 	 
	 	By:	 
	 	 	
              Name:

            
	 	 	
              Title:

            

    

    

      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

     

    EXHIBIT
I

     

    AROTECH
CORPORATION

    CONVERSATION
NOTICE

     

    Reference
is made to the Senior Convertible Note (the "Note") issued to the
undersigned by Arotech Corporation (the "Company").  In
accordance with and pursuant to the Note, the undersigned hereby elects to
convert the Conversion Amount (as defined in the Note) of the Note indicated
below into shares of Common Stock par value $0.01 per share (the "Common Stock"), as of the date
specified below.

     

     

    
      	
              Date
      of Conversion:

            	 
      

    

     

    
      	
              Aggregate Conversion Amount to be converted:

            	 
      

    

     

    
      	
              Installment Amount to be reduced:

            	 
      

    

     

    
      	
              Please
      confirm the following information:

            

    

     

    
      	
              Conversion
      Price:

            	 
      

    

     

    
      	
              Number
      of shares of Common Stock to be issued:

            	 
      

    

     

    
      	
              With
      respect to any Make-Whole Shares, select the 17

              Trading
      Days that shall be used to calculate the Initial

              Make-Whole
      Conversion Price:

            	
               

            
	 

    

     

    
      Notwithstanding
anything to the contrary contained herein, this Conversion Notice shall
constitute a representation by the Holder of the Note submitting this Conversion
Notice that, after giving effect to the conversion provided for in this
Conversion Notice, such Holder (together with its affiliates) will not have
beneficial ownership (together with the beneficial ownership of such Person's
affiliates) of a number of shares of Common Stock which exceeds the maximum
percentage of the total outstanding shares of Common Stock as determined
pursuant to the provisions of Section 3(e) of the Note.

       

      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)

    

    
      
         

      

      
        - 39
-

        
          

        

      

      
         

      

    

    ACKNOWLEDGMENT

     

    The
Company hereby acknowledges this Conversion Notice and hereby directs American
Stock Transfer and Trust Company 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
American Stock Transfer and Trust Company.

     

    

    
      	
               

            	
              AROTECH
      CORPORATION

            
	 	 	 
	 	 	 
	
                                                                             

            	By: 	 
	
               

            	 	Name:
	
               

            	 	
              Title:

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00146-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00146-of-00352.parquet"}]]