Document:

EX-10.2

SENIOR SUBORDINATED CONVERTIBLE NOTE

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS NOTE 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 OR TRANSFERRED OR ASSIGNED UNLESS (A) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE 1933 ACT, OR (B) PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF
COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO
THE COMPANY. 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 19(a) HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE
SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE
HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

The Allied Defense Group, Inc.

Senior Subordinated Convertible Note

	 	 	 
	Issuance Date: March 9, 2006

	 	Original Principal Amount: U.S. $     

FOR VALUE RECEIVED, The Allied Defense Group, Inc., a Delaware corporation (the “Company”),
hereby promises to pay to the order of      or registered assigns (“Holder”) the amount
set out above as the Original Principal Amount (as reduced pursuant to the terms hereof pursuant to
redemption, conversion or otherwise, the “Principal”) when due, whether upon the Maturity Date (as
defined below), acceleration, redemption or otherwise (in each case in accordance with the terms
hereof) and to pay interest (“Interest”) on any outstanding Principal at a rate per annum equal to
the Interest Rate (as defined below), from the date set out above as the Issuance Date (the
"Issuance Date”) until the same becomes due and payable, whether upon an Interest Date (as defined
below), the Maturity Date, acceleration, conversion, redemption or otherwise (in each case in
accordance with the terms hereof). This Senior Subordinated Convertible Note (including all Senior
Subordinated Convertible Notes issued in exchange, transfer or replacement hereof, this “Note”) is
one of an issue of Senior Subordinated Convertible Notes (collectively, the “Notes” and such other
Senior Subordinated Convertible Notes, the “Other Notes”) issued pursuant to the Securities
Purchase Agreement (as defined below). Certain capitalized terms used herein are defined in
Section 30.

(1) MATURITY. On the Maturity Date, the Holder shall surrender this Note to the
Company and 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. The “Maturity
Date” shall be March 9, 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 or any event shall have occurred and be continuing which with the passage of time and
the failure to cure would result in an Event of Default and (ii) through the date that is ten 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) is delivered prior to the
Maturity Date.

(2) INTEREST. Interest on this Note shall commence accruing on the Issuance Date and
shall be computed on the basis of a 365-day year and actual days elapsed and shall be payable in
arrears on the last day of each Calendar Quarter during the period beginning on the Issuance Date
and ending on, and including, the Maturity Date (each, an “Interest Date”) with the first Interest
Date being March 31, 2006. Interest shall be payable on each Interest Date, to the record holder
of this Note on the applicable Interest Date. Prior to the payment of Interest on an Interest
Date, Interest on this Note shall accrue at the Interest Rate and be payable in cash upon any
conversion in accordance with Section 3(c)(i). Upon the occurrence and during the continuance of
an Event of Default, the Interest Rate shall be increased to twelve and one-half percent (12.5%).
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, $0.10 par value per share (the “Common Stock”), on the terms and conditions set
forth in this Section 3.

(a) Conversion Right. Subject to the provisions of Section 3(d), at any time or times
on or after the 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 to the nearest whole share. The Company shall
pay any and all taxes that may be payable with respect to the initial issuance and delivery of
Common Stock upon conversion of any Conversion Amount.

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

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

(ii) “Conversion Price” means, as of any Conversion Date (as defined below) or other
date of determination, $26.4551, subject to adjustment as provided herein.

(c) Mechanics of Conversion.

(i) Optional Conversion. To convert any Conversion Amount into shares of
Common Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by facsimile
(or otherwise deliver), for receipt on or prior to 11:59 p.m., New York Time, on such date,
a copy of an executed notice of conversion in the form attached hereto as Exhibit I
(the “Conversion Notice”) to the Company and (B) if required by Section 3(c)(iv), surrender
this Note to a nationally recognized overnight delivery service for delivery to the Company
(or an indemnification undertaking with respect to this Note in the case of its loss, theft
or destruction). On or before the second (2nd) Trading Day following the date of
receipt of a Conversion Notice, the Company shall transmit by facsimile a confirmation of
receipt of such Conversion Notice to the Holder and the Company’s transfer agent (the
“Transfer Agent”). On or before the third (3rd ) Trading Day following the date
of receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall (1) (X)
provided that the Transfer Agent is participating in the Fast Automated Securities Transfer
Program of the Depository Trust Company (“DTC”) 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, (2) pay to the Holder in cash an amount equal
to the accrued and unpaid Interest on the Conversion Amount up to and including the
Conversion Date and (3) for any conversions prior to the third (3rd) anniversary
of the Issuance Date, pay any applicable Make-Whole Amount in accordance with Section
3(c)(ii). If this Note is physically surrendered for conversion as required by Section
3(c)(iv) 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 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 19(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.

(ii) Make-Whole Amount. If prior to the third (3rd) anniversary of
the Issuance Date, the Holder converts all or any portion of this Note pursuant to Section
3(c)(i) or the Company redeems all or any portion of this Note pursuant to Section 9, then
upon such conversion or redemption, the Holder shall receive the Make-Whole Amount;
provided, however, that in the event that the Closing Sale Price of the Common Stock exceeds
140% of the initial Conversion Price (as adjusted for any stock split, combination,
reclassification or similar transaction) for each of twenty (20) Trading Days out of the
thirty (30) consecutive Trading Day period ended on the Trading Day immediately prior to the
Conversion Date, then the Holder shall not be entitled to receive the Make-Whole Amount.
The Company shall pay any Make-Whole Amount in cash.

(iii) Company’s Failure to Timely Convert. If the Company shall fail to issue
a certificate to the Holder or credit the Holder’s balance account with DTC, as applicable,
for the number of shares of Common Stock to which the Holder is entitled upon conversion of
any Conversion Amount on or prior to the date which is five (5) Trading Days after the
Conversion Date (a “Conversion Failure”), then (A) the Company shall pay damages to the
Holder for each Trading Day of such Conversion Failure in an amount equal to 1.0% of the
product of (I) the sum of the number of shares of Common Stock not issued to the Holder on
or prior to the Share Delivery Date and to which the Holder is entitled, and (II) the
Closing Sale Price of the Common Stock on the Share Delivery Date and (B) the Holder, upon
written notice to the Company, may void its Conversion Notice with respect to, and retain or
have returned, as the case may be, any portion of this Note that has not been converted
pursuant to such Conversion Notice; provided that the voiding of a Conversion Notice
shall not affect the Company’s obligations to make any payments which have accrued prior to
the date of such notice pursuant to this Section 3(c)(iii) or otherwise. In addition to the
foregoing, if within three (3) Trading Days after the Company’s receipt of the facsimile
copy of a Conversion Notice the Company shall fail to issue and deliver a certificate to the
Holder 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, 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 and other
out-of-pocket expenses, if any) for the shares of Common Stock so purchased (the “Buy-In
Price"), at which point the Company’s obligation to deliver such certificate (and to issue
such Common Stock) shall terminate, or (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.

(iv) Book-Entry. Notwithstanding anything to the contrary set forth herein,
upon conversion of any portion of this Note in accordance with the terms hereof, the Holder
shall not be required to physically surrender this Note to the Company unless (A) the full
Conversion Amount represented by this Note is being converted or (B) the Holder has provided
the Company with prior written notice (which notice may be included in a Conversion Notice)
requesting reissuance of this Note upon physical surrender. The Holder and the Company
shall maintain records showing the Principal converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the Holder and the Company, so as
not to require physical surrender of this Note upon conversion.

(v) Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion Date and the
Company can convert some, but not all, of such portions of the Notes submitted for
conversion, the Company, subject to Section 3(d), shall convert from each holder of Notes
electing to have Notes converted on such date a pro rata amount of such holder’s portion of
its Notes submitted for conversion based on the principal amount of Notes submitted for
conversion on such date by such holder relative to the aggregate principal amount of all
Notes submitted for conversion on such date. In the event of a dispute as to the number of
 shares of Common Stock issuable to the Holder in connection with a conversion of this Note,
the Company shall issue to the Holder the number of shares of Common Stock not in dispute
and resolve such dispute in accordance with Section 24.

(d) 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 9.99%
(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 or warrants)
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(d)(i), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended. For purposes of this Section 3(d)(i), in determining the number of outstanding
 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-KSB, Form 10-K, Form 10-QSB,
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
request of the Holder, the Company shall within two (2) Business Days confirm 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 from time to time increase
or decrease the Maximum Percentage to any other percentage not in excess of 9.99% specified
in such notice; provided that (i) any such increase will not be effective until the
sixty-first (61st) day after such notice is delivered to the Company, and (ii)
any such increase or decrease will apply only to the Holder and not to any other holder of
Notes.

(ii) Principal Market Regulation. The Company shall not be obligated to issue
any shares of Common Stock upon conversion of this Note, and the Holder of this Note shall
not have the right to receive upon conversion of this Note any shares of Common Stock, 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 or exercise, as applicable, of the
Notes and Warrants without breaching the Company’s obligations under the rules or
regulations of the Principal Market (the number of shares which may be issued without
violating such rules and regulations, the “Exchange Cap”), except that such limitation shall
not apply in the event that the Company (A) obtains the approval of its stockholders as
required by the applicable rules of the Principal Market for issuances of Common Stock in
excess of such amount or (B) obtains a written opinion from outside counsel to the Company
that such approval is not required, which opinion shall be reasonably satisfactory to the
Required Holders. Unless and until such approval or written opinion is obtained, no
purchaser of the Notes pursuant to the Securities Purchase Agreement (the “Purchasers”)
shall be issued in the aggregate, upon conversion or exercise, as applicable, of Notes or
Warrants, shares of Common Stock in an amount greater than the product of the Exchange Cap
multiplied by a fraction, the numerator of which is the principal amount of Notes issued to
each Purchaser pursuant to the Securities Purchase Agreement on the Closing Date and the
denominator of which is the aggregate principal amount of all Notes issued to the Purchasers
pursuant to the Securities Purchase Agreement on the Closing Date (with respect to each
Purchaser, the “Exchange Cap Allocation”). In the event that any Purchaser shall sell or
otherwise transfer any of such Purchaser’s Notes, the transferee shall be allocated a pro
rata portion of such Purchaser’s Exchange Cap Allocation, and the restrictions of the prior
sentence shall apply to such transferee with respect to the portion of the Exchange Cap
Allocation allocated to such transferee. In the event that any holder of Notes shall
convert all of such holder’s Notes into a number of shares of Common Stock which, in the
aggregate, is less than such holder’s Exchange Cap Allocation, then the difference between
such holder’s Exchange Cap Allocation and the number of shares of Common Stock actually
issued to such holder shall be allocated to the respective Exchange Cap Allocations of the
remaining holders of Notes on a pro rata basis in proportion to the aggregate principal
amount of the Notes then held by each such holder.

(4) RIGHTS UPON EVENT OF DEFAULT.

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

(i) the failure of the applicable Registration Statement required to be filed pursuant
to the Registration Rights Agreement to be declared effective by the SEC on or prior to the
date that is sixty (60) days after the applicable Effectiveness Deadline (as defined in the
Registration Rights Agreement), or, while the applicable Registration Statement is required
to be maintained effective pursuant to the terms of the Registration Rights Agreement, the
effectiveness of the applicable Registration Statement lapses for any reason (including,
without limitation, the issuance of a stop order) or is unavailable to any holder of the
Notes for sale of all of such holder’s Registrable Securities (as defined in the
Registration Rights Agreement) in accordance with the terms of the Registration Rights
Agreement, and such lapse or unavailability continues for a period of ten (10) consecutive
days or for more than an aggregate of thirty (30) days in any 365-day period (other than
days during an Allowable Grace Period (as defined in the Registration Rights Agreement));

(ii) the suspension from trading or failure of the Common Stock to be listed on an
Eligible Market for a period of five (5) consecutive Trading Days or for more than an
aggregate of ten (10) 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) Business Days after the applicable
Conversion Date or (B) written notice 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) at any time following the tenth (10th) consecutive Business Day that
the Holder’s Authorized Share Allocation is less than the number of shares of Common Stock
that the Holder would be entitled to receive upon a conversion of the full Conversion Amount
of this Note (without regard to any limitations on conversion set forth in Section 3(d) or
otherwise);

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

(vi) the occurrence of any default under, redemption of or acceleration prior to
maturity of any Indebtedness of the Company or any of its Subsidiaries which, individually
or in the aggregate, exceeds $250,000 (as defined in Section 3(a) of the Securities Purchase
Agreement), other than with respect to any Other Notes;

(vii) the Company or any of its Subsidiaries, pursuant to or within the meaning of
Title 11, U.S. Code, or any similar Federal, foreign or state law for the relief of debtors
(collectively, “Bankruptcy Law”), (A) commences a voluntary case, (B) consents to the entry
of an order for relief against it in an involuntary case, (C) consents to the appointment of
a receiver, trustee, assignee, liquidator or similar official (a “Custodian”), (D) makes a
general assignment for the benefit of its creditors or (E) admits in writing that it is
generally unable to pay its debts as they become due;

(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
$100,000 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 $100,000 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) the Company breaches any representation, warranty, covenant or other material term
or condition of any Transaction Document, except, in the case of a breach of a covenant
which is curable, only if such breach continues for a period of at least ten (10)
consecutive Business Days;

(xi) any breach or failure in any respect to comply with Section 4(r) or Section 4(s)
of the Securities Purchase Agreement or Section 15 of this Note, except in the case of a
failure to satisfy the Quarterly Test, in which case only if such failure continues for a
period of at least thirty (30) days; or

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

(b) Redemption Right. Upon the occurrence of an Event of Default with respect to this
Note or any Other Note, the Company shall within two (2) Business Days deliver written notice
thereof via facsimile and overnight courier (an “Event of Default Notice”) to the Holder. At any
time after the earlier of the Holder’s receipt of an Event of Default Notice and the Holder
becoming aware of an Event of Default, the Holder may require the Company to redeem all or any
portion of this Note by delivering written notice thereof (the “Event of Default Redemption
Notice”) to the Company, which Event of Default Redemption Notice shall indicate the portion of
this Note the Holder is electing to redeem. Each portion of this Note subject to redemption by the
Company pursuant to this Section 4(b) shall be redeemed by the Company at a price equal to the sum
of (i) any accrued and unpaid Interest on the Conversion Amount to be redeemed and any accrued and
unpaid Late Charges on such Conversion Amount and Interest and (ii) the greater of (A) the product
of (1) the Conversion Amount to be redeemed and (2) the Redemption Premium and (B) the product of
(1) 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 (2) the Closing Sale Price of the Common Stock
on the date immediately preceding such Event of Default (the “Event of Default Redemption Price”).
Redemptions required by this Section 4(b) shall be made in accordance with the provisions of
Section 12. To the extent redemptions required by this Section 4(b) are deemed or determined by a
court of competent jurisdiction to be prepayments of the Note by the Company, such redemptions
shall be deemed to be voluntary prepayments. The parties hereto agree that in the event of the
Company’s redemption of any portion of the Note under this Section 4(b), the Holder’s damages would
be uncertain and difficult to estimate because of the parties’ inability to predict future interest
rates and the uncertainty of the availability of a suitable substitute investment opportunity for
the Holder. Accordingly, any 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, having similar
conversion rights as the Notes and having similar ranking to the Notes 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 of the Notes prior to such Fundamental Transaction,
such shares of publicly traded common stock (or their equivalent) of the Successor 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 of this Note.

(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 (the “Change
of Control Period”) beginning after the Holder’s receipt of a Change of Control Notice and ending
on the date that is twenty (20) Trading 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 in cash at a price equal to the greater of (i) the sum of (x) the product of the Change of
Control Redemption Premium and the Conversion Amount being redeemed and (y) the amount of any
accrued but unpaid Interest thereon through the date of such redemption payment and (ii) the
product of (x) the Equity Value Redemption Premium and (y) the sum of (1) the product of (A) the
Conversion Amount being redeemed multiplied by (B) the quotient determined by dividing (I) the
aggregate cash consideration and the aggregate cash value of any non-cash consideration per Common
Share to be paid to the holders of the Common Shares upon consummation of the Change of Control
(any such non-cash consideration consisting of marketable securities to be valued at the higher of
the Closing Sale Price of such securities as of the Trading Day immediately prior to or the Trading
Day following the public announcement of such proposed Change of Control) by (II) the Conversion
Price plus (2) the amount of any accrued but unpaid Interest on such Conversion Amount being
redeemed through the date of such redemption payment, (the “Change of Control Redemption Price”).
Redemptions required by this Section 5 shall be made in accordance with the provisions of Section
12 and shall have priority to payments to shareholders in connection with a Change of Control. To
the extent redemptions required by this Section 5(b) are deemed or determined by a court of
competent jurisdiction to be prepayments of the Note by the Company, such redemptions shall be
deemed to be voluntary prepayments. Notwithstanding anything to the contrary in this Section 5,
until the Change of Control Redemption Price (together with any interest thereon) is paid in full,
the Conversion Amount submitted for redemption under this Section 5(c) may be converted, in whole
or in part, by the Holder into shares of Common Stock, or in the event the Conversion Date is after
the consummation of the Change of Control, shares of publicly traded common stock (or their
equivalent) of the Successor Entity pursuant to Section 3. The parties hereto agree that in the
event of the Company’s redemption of any portion of the Note under this Section 5(b), the Holder’s
damages would be uncertain and difficult to estimate because of the parties’ inability to predict
future interest rates and the uncertainty of the availability of a suitable substitute investment
opportunity for the Holder. Accordingly, any redemption premium due under this Section 5(b) is
intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual
loss of its investment opportunity and not as a penalty.

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

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

(b) Other Corporate Events. In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which
holders of shares of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make
appropriate provision to insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, at the Holder’s option, (i) in addition to the shares of Common Stock
receivable upon such conversion, such securities or other assets to which the Holder would have
been entitled with respect to such shares of Common Stock had such shares of Common Stock been held
by the Holder upon the consummation of such Corporate Event (without taking into account any
limitations or restrictions on the convertibility of this Note) or (ii) in lieu of the shares of
Common Stock otherwise receivable upon such conversion, such securities or other assets received by
the holders of shares of Common Stock in connection with the consummation of such Corporate Event
in such amounts as the Holder would have been entitled to receive had this Note initially been
issued with conversion rights for the form of such consideration (as opposed to shares of Common
Stock) at a conversion rate for such consideration commensurate with the Conversion Rate. 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, the Company issues or sells, or in accordance with this Section
7(a) is deemed to have issued or sold, any shares of Common Stock (including the issuance or sale
of shares of Common Stock owned or held by or for the account of the Company, but excluding shares
of Common Stock deemed to have been issued or sold by the Company in connection with any Excluded
Security) for a consideration per share less than a price (the “Applicable Price”) equal to the
Conversion Price in effect immediately prior to such issue or sale (the foregoing a “Dilutive
Issuance”), then immediately after such Dilutive Issuance, the Conversion Price then in effect
shall be reduced to an amount equal the product of (A) the Conversion Price in effect immediately
prior to such Dilutive Issuance and (B) the quotient determined by dividing (1) the sum of (I) the
product derived by multiplying the Conversion Price in effect immediately prior to such Dilutive
Issuance and the number of shares of Common Stock Deemed Outstanding immediately prior to such
Dilutive Issuance plus (II) the consideration, if any, received by the Company upon such Dilutive
Issuance, by (2) the product derived by multiplying (I) the Conversion Price in effect immediately
prior to such Dilutive Issuance by (II) the number of shares of Common Stock Deemed Outstanding
immediately after such Dilutive Issuance. For purposes of determining the adjusted Conversion
Price under this Section 7(a), the following shall be applicable:

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

(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, the Options will be deemed to have been issued for a consideration
of $.01. If any Common Stock, Options or Convertible Securities are issued or sold or
deemed to have been issued or sold for cash, the consideration received therefor will be
deemed to be the net amount received by the Company therefor. If any Common Stock, Options
or Convertible Securities are issued or sold for a consideration other than cash, the amount
of the consideration as determined in good faith by the Board of Directors 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 in good faith by the
Board of Directors.

(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.

(vi) Floor Price. Until such time as the Company receives, the Stockholder
Approval (as defined in the Securities Purchase Agreement), no adjustment pursuant to
Section 7(a) shall cause the Conversion Price to be less than $23.05, as adjusted for any
stock dividend, stock split, stock combination, reclassification or similar transaction (the
“Conversion Floor Price”).

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

(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.

(8) HOLDER’S RIGHT OF OPTIONAL REDEMPTION. At any time during the thirty (30) day
period commencing on the earlier of (i) the filing of the Company’s Form 10-K for the fiscal year
ending December 31, 2008, (the “2008 10-K”) and (ii) the applicable date the Company is required to
file the 2008 10-K as set forth in the Securities Exchange Act of 1934, as amended, the Holder
shall have the right, in its sole discretion, to require that the Company redeem (each, a “Holder
Optional Redemption”) up to all of the Conversion Amount of this Note plus any accrued and unpaid
Interest with respect to such Principal and Interest and any accrued and unpaid Late Charges, if
any, with respect to such Principal and Interest (the “Available Holder Optional Redemption
Amount”) by delivering written notice thereof (a “Holder Optional Redemption Notice”) to the
Company. The Holder Optional Redemption Notice shall indicate the amount of the Available Holder
Optional Redemption Amount the Holder is electing to have redeemed (the “Holder Optional Redemption
Amount”) and the date of such redemption (the “Holder Optional Redemption Date”); provided, however
that such Holder Optional Redemption Date shall not be less than three (3) Business Days after the
date of delivery of such Holder Optional Redemption Notice. The portion of this Note subject to
redemption pursuant to this Section 8 shall be redeemed by the Company in cash on the Holder
Optional Redemption Date at a price equal to the Holder Optional Redemption Amount being redeemed
(the “Holder Optional Redemption Price”). Redemptions required by this Section 8 shall be made in
accordance with the provisions of Section 12. Notwithstanding anything to the contrary in this
Section 8, but subject to Section 3(d), until the Holder receives the Holder Optional Redemption
Price, the Holder Optional Redemption Amount may be converted, in whole or in part, by the Holder
into Common Stock pursuant to Section 3, and any such conversion shall reduce the Holder Optional
Redemption Amount in the manner set forth by the Holder in the applicable Conversion Notice.
Notwithstanding the foregoing, from and after the filing of the 2008 10-K, if the Company’s EBITDA
for such fiscal year as set forth in the 2008 10-K exceeds $22,500,000, the Holder shall have no
right to require redemption of this Note pursuant to this Section 8.

(9) OPTIONAL REDEMPTION AT THE COMPANY’S ELECTION.

(a) General. If at any time, and from time to time, from and after the second
(2nd) anniversary of the Issuance Date (the “Optional Redemption Eligibility Date”), (i)
the average Closing Sale Price of the Common Stock for any twenty (20) Trading Days out of any
thirty (30) consecutive Trading Day period exceeds 175% of the Conversion Price then in effect
following the Optional Redemption Eligibility Date (the “Optional Redemption Condition”) and (ii)
there has been no Equity Conditions Failure, the Company shall have the right, provided the
Optional Redemption Condition is also met on and as of the Optional Redemption Date, to redeem all
or any portion of the Conversion Amount then remaining under this Note (the “Optional Redemption
Amount”) as designated in the Optional Redemption Notice, as of the Optional Redemption Date (an
"Optional Redemption”). The portion of this Note subject to redemption pursuant to this Section 9
shall be redeemed by the Company in cash at a price equal to the sum of (i) the Conversion Amount
being redeemed, (B) the applicable Make-Whole Amount, (C) the amount of any accrued and unpaid
Interest on such Conversion Amount through the Optional Redemption Date and (D) the amount of any
accrued and unpaid Late Charges, if any, on such Conversion Amount and related Interest through the
Optional Redemption Date (the “Optional Redemption Price”). The Company may exercise its right to
require redemption under this Section 9 by delivering a written notice thereof by facsimile and
overnight courier to all, but not less than all, of the holders of Notes (the “Optional Redemption
Notice” and the date all of the holders received such notice is referred to as the “Optional
Redemption Notice Date”) and each Optional Redemption Notice shall be irrevocable. The Optional
Redemption Notice shall state (1) the date on which the Optional Redemption shall occur (the
"Optional Redemption Date”) which date shall be not less than five (5) Trading Days nor more than
thirty (30) Trading Days after the Optional Redemption Notice Date, and (2) the aggregate
Conversion Amount of the Notes which the Company has elected to be subject to Optional Redemption
from all of the holders of the Notes pursuant to this Section 9 (and analogous provisions under
the Other Notes) on the Optional Redemption Date; provided, however, that the Company shall not
redeem a Conversion Amount under this Section in excess of the Holder’s Pro Rata Amount of the
aggregate dollar trading volume (as reported on Bloomberg) of the Common Stock over the thirty (30)
consecutive Trading Day period ending on the Trading Day immediately preceding the Optional
Redemption Notice Date. The Company may not effect more than one (1) Optional Redemption during
any consecutive thirty (30) Trading Day period. Notwithstanding anything to the contrary in this
Section 9, until the Optional Redemption Price is paid, in full, the Optional Redemption Amount may
be converted, in whole or in part, by the Holders into shares of Common Stock pursuant to Section
3. All Conversion Amounts converted by the Holder after the Optional Redemption Notice Date shall
reduce the Optional Redemption Amount of this Note required to be redeemed on the Optional
Redemption Date. Redemptions made pursuant to this Section 9 shall be made in accordance with
Section 12.

(b) Pro Rata Redemption Requirement. If the Company elects to cause an Optional
Redemption pursuant to Section 9(a), then it must simultaneously take the same action with respect
to the Other Notes. If the Company elects to cause an Optional Redemption pursuant to Section 9(a)
(or similar provisions under the Other Notes) with respect to less than all of the Conversion
Amounts of the Notes then outstanding, then the Company shall require redemption of a Conversion
Amount from each of the holders of the Notes equal to the product of (i) the aggregate Conversion
Amount of Notes which the Company has elected to cause to be redeemed pursuant to Section 9(a),
multiplied by (ii) the fraction, the numerator of which is the sum of the aggregate initial
principal amount of the Notes purchased by such holder of outstanding Notes and the denominator of
which is the sum of the aggregate initial principal amount of the Notes purchased by all holders
holding outstanding Notes (such fraction with respect to each holder is referred to as its
"Redemption Allocation Percentage”, and such amount with respect to each holder is referred to as
its “Pro Rata Redemption Amount”); provided, however that in the event that any holder’s Pro Rata
Redemption Amount exceeds the outstanding Principal amount of such holder’s Note, then such excess
Pro Rata Redemption Amount shall be allocated amongst the remaining holders of Notes in accordance
with the foregoing formula. In the event that the initial holder of any Notes shall sell or
otherwise transfer any of such holder’s Notes, the transferee shall be allocated a pro rata portion
of such holder’s Redemption Allocation Percentage and Pro Rata Redemption Amount.

(10) NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will
not, by amendment of its Certificate of Incorporation, Bylaws or through any reorganization,
transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Note, and will at all times in good faith carry out all of the provisions
of this Note and take all action as may be required to protect the rights of the Holder of this
Note.

(11) RESERVATION OF AUTHORIZED SHARES.

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

(b) Insufficient Authorized Shares. If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and unreserved shares of
Common Stock to satisfy its obligation to reserve for issuance upon conversion of the Notes at
least a number of shares of Common Stock equal to the Required Reserve Amount (an “Authorized Share
Failure”), then the Company shall immediately take all action necessary to increase the Company’s
authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the
Required Reserve Amount for the Notes then outstanding. Without limiting the generality of the
foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share
Failure, but in no event later than ninety (90) 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) HOLDER’S REDEMPTIONS.

(a) Mechanics. The Company shall deliver the applicable Event of Default Redemption
Price to the Holder within five (5) Business Days after the Company’s receipt of the Holder’s Event
of Default Redemption Notice. If the Holder has submitted a 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. The Company shall deliver the Holder
Optional Redemption Price to the Holder on the Holder Optional Redemption Date and the Optional
Redemption Price on the applicable Optional Redemption Date. In the event of a redemption of less
than all of the Conversion Amount of this Note, the Company shall promptly cause to be issued and
delivered to the Holder a new Note (in accordance with Section 19(d)) representing the outstanding
Principal which has not been redeemed. In the event that the Company does not pay the applicable
Redemption Price to the Holder within the time period required, at any time thereafter and until
the Company pays such unpaid Redemption Price in full, the Holder shall have the option, in lieu of
redemption, to require the Company to promptly return to the Holder all or any portion of this Note
representing the Conversion Amount that was submitted for redemption and for which the applicable
Redemption Price (together with any Late Charges thereon) has not been paid. Upon the Company’s
receipt of such notice, (x) the Redemption Notice shall be null and void with respect to such
Conversion Amount, (y) the Company shall immediately return this Note, or issue a new Note (in
accordance with Section 19(d)) to the Holder representing such Conversion Amount and (z) the
Conversion Price of this Note or such new Notes shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the Redemption Notice is voided and (B) the
lowest Closing Bid Price during the period beginning on and including the date on which the
Redemption Notice is delivered to the Company and ending on and including the date on which the
Redemption Notice is voided. The Holder’s delivery of a notice voiding a Redemption Notice and
exercise of its rights following such notice shall not affect the Company’s obligations to make any
payments of Late Charges which have accrued prior to the date of such notice with respect to the
Conversion Amount subject to such notice.

(b) Redemption by Other Holders. Upon the Company’s receipt of notice from any of the
holders of the Other Notes for redemption or repayment as a result of an event or occurrence
substantially similar to the events or occurrences described in Section 4(b), Section 5(b) or
Section 8 (each, an “Other Redemption Notice”), the Company shall immediately, but no later than
one (1) Business Day of its receipt thereof), forward to the Holder by facsimile a copy of such
notice. If the Company receives a Redemption Notice and one or more Other Redemption Notices,
during the seven (7) Business Day period beginning on and including the date which is three (3)
Business Days prior to the Company’s receipt of the Holder’s Redemption Notice and ending on and
including the date which is three 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 (7) Business Day period.

(13) 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.

(14) 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 Delaware General Corporation Law,
and as expressly provided in this Note.

(15) COVENANTS.

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

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

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

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

(16) RIGHTS UPON DISTRIBUTION OF ASSETS. Subject to the provisions of Section 4(j) of
the Securities Purchase Agreement, if the Company shall declare or make any dividend or other
distribution of its assets (or rights to acquire its assets) to holders of Common Stock, by way of
return of capital or otherwise (including, without limitation, any distribution of cash, shares or
other securities, property or options by way of a dividend, spin off, reclassification, corporate
rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time
after the issuance of this Note, then, in each such case any Conversion Price in effect immediately
prior to the close of business on the record date fixed for the determination of holders of Common
Stock entitled to receive the Distribution shall be reduced, effective as of the close of business
on such record date, to a price determined by multiplying such Conversion Price by a fraction of
which (i) the numerator shall be the Closing Bid Price of the Common Stock on the Trading Day
immediately preceding such record date minus the value of the Distribution (as determined in good
faith by the Company’s Board of Directors) applicable to one share of Common Stock, and (ii) the
denominator shall be the Closing Bid Price of the Common Stock on the Trading Day immediately
preceding such record date.

(17) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. No term of this Note may be
amended or modified unless pursuant to a writing signed by the Company and the Required Holders;
provided, however, that any amendment or modification that pursuant to the terms of
the Transaction Documents adversely and disproportionately affects any holder of Notes that holds
at least $1 million in principal amount of Notes (and not because of the nature or situation of
such holder of Notes) shall require the prior written consent of such holder. The affirmative vote
at a meeting duly called for such purpose or the written consent without a meeting of the Required
Holders shall be required for any change or amendment to this Note or the Other Notes.

(18) TRANSFER. This Note may be offered, sold, assigned or transferred by the Holder
without the consent of the Company, subject only to the provisions of Section 2(f) of the
Securities Purchase Agreement; provided, however, that no such sale, assignment or transfer of this
Note shall be in a denomination less than the lesser of (a) $500,000 and (b) the remaining
outstanding Principal of this Note, the accrued and unpaid Interest with respect to such Principal
and the accrued and unpaid Late Charges with respect to such Principal and Interest;.

(19) REISSUANCE OF THIS NOTE.

(a) Transfer. If this Note is to be transferred, the Holder shall surrender this Note
to the Company, whereupon the Company will, subject to the satisfaction of the transfer provisions
of the Securities Purchase Agreement, forthwith issue and deliver upon the order of the Holder a
new Note (in accordance with Section 19(d)), registered in the name of the registered transferee or
assignee, representing the outstanding Principal being transferred by the Holder and, if less then
the entire outstanding Principal is being transferred, a new Note (in accordance with Section
19(d)) to the Holder representing the outstanding Principal not being transferred. The Holder and
any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions
of Section 3(c)(iii) and this Section 19(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 19(d)) representing the outstanding Principal.

(c) Note Exchangeable for Different Denominations. This Note is exchangeable, upon
the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes
(in accordance with Section 19(d) and in principal amounts of at least $100,000) representing in
the aggregate the outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time of such surrender.

(d) Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii)
shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or
in the case of a new Note being issued pursuant to Section 19(a) or Section 19(c), the Principal
designated by the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining outstanding under
this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as
indicated on the face of such new Note, which is the same as the Issuance Date of this Note, (iv)
shall have the same rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges on the Principal and Interest of this Note, from the Issuance Date.

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

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

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

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

(24) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the arithmetic
calculation of the Conversion Rate or any Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within two (2) Business Days of receipt, or
deemed receipt, of the Conversion Notice or Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are unable to agree upon
such determination or calculation within two (2) Business Days of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall, within two (2)
Business Days submit via facsimile (a) the disputed determination of the Closing Bid Price, the
Closing Sale Price or the Weighted Average Price to an independent, reputable investment bank
selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of
the Conversion Rate or any Redemption Price to the Company’s independent, outside accountant. The
Company, at the Company’s expense, shall cause the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and the Holder of the
results no later than five (5) Business Days from the time it receives the disputed determinations
or calculations. Such investment bank’s or accountant’s determination or calculation, as the case
may be, shall be binding upon all parties absent demonstrable error.

(25) NOTICES; PAYMENTS.

(a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of
all actions taken pursuant to this Note, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the foregoing, the Company
will give written notice to the Holder (i) immediately upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at
least twenty (20) days prior to the date on which the Company closes its books or takes a record
(A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro
rata subscription offer to holders of Common Stock or (C) for determining rights to vote with
respect to any Fundamental Transaction, dissolution or liquidation, provided in each case that such
information shall be made known to the public prior to or in conjunction with such notice being
provided to the Holder.

(b) Payments. Whenever any payment of cash is to be made by the Company to any Person
pursuant to this Note, such payment shall be made in lawful money of the United States of America
by a check drawn on the account of the Company and sent via overnight courier service to such
Person at such address as previously provided to the Company in writing (which address, in the case
of each of the Purchasers, shall initially be as set forth on the Schedule of Buyers attached to
the Securities Purchase Agreement); provided that the Holder may elect to receive a payment of cash
via wire transfer of immediately available funds by providing the Company with prior written notice
setting out such request and the Holder’s wire transfer instructions. Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a Business Day and, in
the case of any Interest Date which is not the date on which this Note is paid in full, the same
shall instead be due on the next succeeding day which is a Business Day. Any amount of Principal
or other amounts due under the Transaction Documents, other than Interest, 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 twelve and one-half percent (12.5%) per annum from the date
such amount was due until the same is paid in full (“Late Charge”).

(26) 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.

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

(28) GOVERNING LAW; JURISDICTION; JURY TRIAL. 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. 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 it set forth on
the signature page hereto 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. In the event that any provision of this
Note is invalid or unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any such provision which may prove invalid
or unenforceable under any law shall not affect the validity or enforceability of any other
provision of this Note. Nothing contained herein shall be deemed or operate to preclude the Holder
from bringing suit or taking other legal action against the Company in any other jurisdiction to
collect on the Company’s obligations to the Holder, to realize on any collateral or any other
security for such obligations, or to enforce a judgment or other court ruling in favor of the
Holder. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

(29) SUBORDINATION TO PERMITTED INDEBTEDNESS.

(a) Subordination. The indebtedness represented by this Note and the payment of any
Principal, Interest, Late Charges, redemption amount, liquidated damages, fees, expenses or any
other amounts in respect of this Note (collectively, the “Subordinated Indebtedness”) is hereby
expressly made subordinate and junior and subject in all respects to the right of payment and to
the prior payment in full of all Permitted Senior Indebtedness of the Company hereinafter incurred.

(b) Payment upon Dissolution, Etc. In the event of any bankruptcy, insolvency,
reorganization, receivership, composition, assignment for benefit of creditors or other similar
proceeding initiated by or against the Company, or any dissolution or winding up or total or
partial liquidation or reorganization in bankruptcy of the Company (each, a “Proceeding”), all
principal, interest and other obligations due upon any Permitted Senior Indebtedness shall first be
paid or collateralized in full in cash (or cash equivalents) before the Holder shall be entitled to
receive or, if received, to retain any payment or distribution of any Subordinated Indebtedness
and, during the continuance of any such Proceeding, any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to which the Holder
would be entitled with respect to any Subordinated Indebtedness but for the provisions of this
Section 29 shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating
trustee, agent or other Person making such payment or distribution, or by the Holder who shall have
received such payment or distribution, directly to the holders of the Permitted Senior Indebtedness
(pro rata to each such holder on the basis of the respective amounts of such Permitted Senior
Indebtedness held by such holder) or their representatives to the extent necessary to pay (or
collaterize in cash) all such Permitted Senior Indebtedness in full after giving effect to any
concurrent payment or distribution to or for the holders of such Permitted Senior Indebtedness,
before any payment or distribution of any of the Subordinated Indebtedness is made to (or retained
by) the Holder or any other holders of any of the Notes.

(c) Certain Rights. Nothing contained in this Section 29 or elsewhere in this Note or
any other Transaction Document, is intended to or shall impair, as among the Company, its creditors
including the holders of Permitted Senior Indebtedness and the Holder, the right, which is absolute
and unconditional, of the Holder to convert this Note in accordance herewith.

(d) Rights of Holder Unimpaired. The provisions of this Section 29 are and are
intended solely for the purposes of defining the relative rights of the Holder and the holders of
Permitted Senior Indebtedness and nothing in this Section 29 shall impair, as between the Company
and the Holder, the obligation of the Company, which is unconditional and absolute, to pay to the
Holder the Principal hereof (and premium, if any), accrued Interest hereon and all other
Subordinated Indebtedness payable hereunder, all in accordance with the terms of this Note.

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

(a) "Approved Stock Plan” means any employee benefit plan or long term stock incentive 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, consultant, officer or director for services provided to
the Company.

(b) "Bloomberg” means Bloomberg Financial Markets.

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

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

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

(f) "Change of Control Consideration” means, for any Change of Control, an amount equal to the
sum of the aggregate cash consideration and the aggregate cash value of any marketable securities
per share of Common Stock to be paid to the holders of the Common Stock upon consummation of such
Change of Control, with any such marketable securities to be valued at the Closing Sale Price of
such securities as of the Trading Day following the public announcement of such proposed Change of
Control.

(g) "Change of Control Redemption Premium” means (i) for Change of Control events consummated
prior to the third (3rd) anniversary of the Issuance Date, 120% and (ii) for Change of
Control events consummated following the third (3rd) anniversary of the Issuance Date,
110%; provided, however, that, in connection with any Change of Control in which the Change of
Control Consideration (A) consists solely of cash, marketable securities or a combination thereof
and (B) equals or exceeds 150% of the initial Conversion Price, then the Change of Control
Redemption Premium shall equal 100%.

(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 24. All such determinations to be appropriately adjusted for any
stock dividend, stock split, stock combination or other similar transaction during the applicable
calculation period.

(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 or exercise, as
applicable, of the Notes and the Warrants.

(k) "Consolidated EBITDA” means, with respect to any Person for any applicable Calendar
Quarters, the Consolidated Net Income of such Person and its Subsidiaries as set forth in the
financial statements of the Company contained in the Form 10-Q or Form 10-K for the most recent
Calendar Quarters for which financials are publicly available, plus without duplication,
the sum of the following amounts of such Person and its Subsidiaries for such period and to the
extent deducted in determining Consolidated Net Income of such Person for such period: (i)
Consolidated Net Interest Expense, (ii) income tax expense, (iii) depreciation expense,
(iv) amortization expense, and (v) any non-cash impact of hedge or derivative accounting
adjustments.

(l) "Consolidated Net Income” means, with respect to any Person for any period, the net income
(loss) of such Person and its Subsidiaries for such period, determined on a consolidated basis and
in accordance with GAAP, but excluding from the determination of Consolidated Net Income (without
duplication) (i) any extraordinary or non recurring gains or losses or gains or losses from
dispositions of assets, (ii) restructuring charges, (iii) any tax refunds, net operating losses or
other net tax benefits, (iv) effects of discontinued operations and (v) interest income (including
interest paid-in-kind)

(m) "Consolidated Net Interest Expense” means, with respect to any Person for any period,
gross interest expense of such Person and its Subsidiaries for such period determined on a
consolidated basis and in accordance with GAAP (including, without limitation, interest expense
paid to affiliates of such Person), less (i) the sum of (A) interest income for such period
and (B) gains for such period on hedging agreements (to the extent not included in interest income
above and to the extent not deducted in the calculation of gross interest expense), plus
(ii) the sum of (A) losses for such period on hedging agreements (to the extent not included in
gross interest expense) and (B) the upfront costs or fees for such period associated with hedging
agreements (to the extent not included in gross interest expense), in each case, determined on a
consolidated basis and in accordance with GAAP.

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

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

(p) "EBITDA Target” means, from and after the Effective Date, the Company has reported LTM
Consolidated EBITDA from or after the Calendar Quarter ended March 31, 2006 equal to or greater
than $4,000,000.

(q) "EBITDA Test” means that (i) the Equity Conditions have been satisfied as of the
applicable date of determination and (ii) the Company has either (A) for the Calendar Quarter ended
March 31, 2006, for the two (2) consecutive Calendar Quarters ended June 30, 2006 and for the three
(3) consecutive Calendar Quarters ended September 30, 2006, reported a Consolidated EBITDA in
excess of $10,000,000 or (B) for Calendar Quarters ended from and after December 31, 2006, reported
LTM Consolidated EBITDA in excess of $10,000,000.

(r) "Effective Date” has the meaning set forth in the Registration Rights Agreement.

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

(t) "Equity Conditions” means that each of the following conditions is satisfied: (i) on each
day during the period beginning six (6) months prior to the applicable date of determination and
ending on and including the applicable date of determination (the “Equity Conditions Measuring
Period”), either (x) the Registration Statement filed pursuant to the Registration Rights Agreement
shall be effective and available for the resale of all remaining Registrable Securities in
accordance with the terms of the Registration Rights Agreement and there shall not be in effect any
Grace Periods (as defined in the Registration Rights Agreement) or (y) all shares of Common Stock
issuable upon conversion of the Notes and exercise of the Warrants shall be eligible for sale
without restriction and without the need for registration under any applicable federal or state
securities laws; (ii) on each day during the Equity Conditions Measuring Period, the Common Stock
is designated for quotation on the Principal Market and shall not have been suspended from trading
on such exchange or market (other than suspensions of not more than two days and occurring prior to
the applicable date of determination due to business announcements by the Company) nor shall
delisting or suspension by such exchange or market been threatened or pending either (A) in writing
by such exchange or market or (B) by falling below the minimum listing maintenance requirements of
such exchange or market; (iii) during the 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 shares of Common Stock upon exercise of the Warrants
to the holders on a timely basis as set forth in Section 3(c)(i) hereof (and analogous provisions
under the Other Notes) and Section 1(a) of the Warrants; (iv) any applicable shares of Common Stock
to be issued in connection with the event requiring determination may be issued in full without
violating Section 3(d) hereof and the rules or regulations of the Principal Market; (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 and shares of Common Stock issuable
upon exercise of the Warrants not to be eligible for sale without restriction pursuant to Rule
144(k) and any applicable state securities laws; (viii) the Company otherwise shall have been in
material compliance with and shall not have materially breached any provision, covenant,
representation or warranty of any Transaction Document; and (ix) the Stockholder Approval shall
have been obtained.

(u) "Equity Conditions Failure” means that during any period commencing with the Optional
Redemption Notice Date through the Optional Redemption Date, the Equity Conditions have not been
satisfied (or waived in writing by the Holder).

(v) "Equity Value Redemption Premium” means (i) for Change of Control events consummated prior
to the third (3rd) anniversary of the Issuance Date, 115% and (ii) for Change of Control
events consummated following the third (3rd) anniversary of the Issuance Date, 107.5%;
provided, however, that, in connection with any Change of Control in which the Change of Control
Consideration (A) consists solely of cash, marketable securities or a combination thereof and (B)
equals or exceeds 150% of the Conversion Price, then the Equity Value Redemption Premium shall
equal 100%.

(w) "Excluded Securities” means any Common Stock issued or issuable: (i) in connection with
any Approved Stock Plan; (ii) upon conversion, adjustment or redemption of the Notes, or the
exercise of the Warrants; (iii) pursuant to a bona fide firm commitment underwritten public
offering with a nationally recognized underwriter which generates gross proceeds to the Company in
excess of $35,000,000 (other than an “at the market” offering as defined in Rule 415(a)(4) under
the Securities Act of 1933, as amended, and “equity lines”); (iv) in connection with any strategic
acquisition or strategic transaction, whether through an acquisition of shares or a merger of any
business, assets or technologies, the primary purpose of which is not to raise equity capital in an
amount not to exceed, in the aggregate twenty percent (20%) of the outstanding shares of Common
Stock in any twelve (12) month period; (v) upon conversion, exercise or exchange of any Options or
Convertible Securities which are outstanding on the day immediately preceding the Subscription
Date, provided that the conversion price, exercise price or any other economic terms of such
Options or Convertible Securities are not amended, modified or changed on or after the Subscription
Date; and (vi) in connection with any stock split, stock dividend, recapitalization or similar
transaction by the Company for which adjustment is made pursuant to Section 7(b).

(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 (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 or Persons to make a purchase, tender or exchange offer that is accepted by
the holders of more than the 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 Person or 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 either 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), (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) "Holder Pro Rata Amount” means a fraction (i) the numerator of which is the Original
Principal Amount of this Note and (ii) the denominator of which is the aggregate original principal
amount of all Notes issued to the initial purchasers pursuant to the Securities Purchase Agreement
on the Closing Date.

(aa) "Indebtedness” of any Person means, without duplication (i) all indebtedness for borrowed
money, (ii) all obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) “capital leases” in accordance with generally
accepted accounting principles (other than trade payables entered into in the ordinary course of
business), (iii) all reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (iv) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under any conditional
sale or other title retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even though the rights and
remedies of the seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles, consistently
applied for the periods covered thereby, is classified as a capital lease, (vii) all indebtedness
referred to in clauses (i) through (vi) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien,
pledge, charge, security interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which owns such assets or
property has not assumed or become liable for the payment of such indebtedness, and (viii) all
Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to
in clauses (i) through (vii) above.

(bb) "Interest Rate” means, initially seven and one-half percent (7.5%) per annum, subject to
adjustment at the beginning of each Calendar Quarter (only with respect to such Calendar Quarter
and not the immediately preceding or subsequent Calendar Quarter and only with respect to any
Principal outstanding at the time the Company publicly announces the applicable Consolidated EBITDA
or LTM Consolidated EBITDA, as applicable) in the event that the EBITDA Test is satisfied as of the
applicable Calendar Quarter, then the Interest Rate shall equal five percent (5.0%) per annum for
such Calendar Quarter.

(cc) "LTM Consolidated EBITDA” means, with respect to any Person, the Consolidated Net Income
of such Person and its Subsidiaries as set forth in the financial statements of the Company
contained in the Form 10-Q or Form 10-K for the most recent four (4) Calendar Quarters for which
financials are publicly available, plus (i) without duplication, the sum of the following
amounts of such Person and its Subsidiaries for such period and to the extent deducted in
determining Consolidated Net Income of such Person for such period: (i) Consolidated Net Interest
Expense, (ii) income tax expense, (iii) depreciation expense, (iv) amortization expense and (v) any
non-cash impact of hedge or derivative accounting adjustments.

(dd) "Make-Whole Amount” means, as to any Conversion Amount being converted pursuant to
Section 3(c)(ii) or redeemed pursuant to Section 9, an amount equal to the sum of (i) any accrued
and unpaid Interest on such Conversion Amount and (ii) any remaining Interest that, but for the
applicable conversion or redemption would have been due on such Conversion Amount through the third
(3rd) anniversary of the Issuance Date. For purposes of this definition, Interest shall
be computed on the basis of a 360-day year. By way of illustration, assuming the initial Interest
Rate is in effect and assuming conversion or redemption occurs on the initial Issuance Date on a
Principal amount equal to $1,000, the Make-Whole Amount shall equal $225.00 ($1,000 x (1080/360 x
7.5%)).

(ee) "Mecar Facility” means the Credit Agreement, by and between Wafabank, Deutsche Bank,
Commerzbank AG, CBC Banque and Fortis Banque and Mecar S.A. in the form attached as Exhibit 10.7 to
the Quarterly Report on Form 10-Q of the Company for the period ending June 30, 2002 and filed with
the SEC on August 14, 2002.

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

(gg) "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.

(hh) "Permitted Indebtedness” means (A) Permitted Senior Indebtedness, (B) Indebtedness
evidenced by this Note and the Other Notes, (C) other unsecured Indebtedness incurred by the
Company and/or any of its Subsidiaries 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
Holder and approved by the Holder 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 the Interest Rate hereunder, (D)
Indebtedness secured by Permitted Liens, (E) Indebtedness to trade creditors incurred in the
ordinary course of business, (F) extensions, refinancings and renewals of any items of Permitted
Indebtedness, provided that the principal amount is not increased or the terms modified to impose
more burdensome terms upon the Company or its Subsidiary, as the case may be, (G) a Promissory
Note, dated as of November 1, 2005, issued to Sam Nasiri in the aggregate principal amount of
$11,011,083.00, (H) certain earn out payments based on the performance of Global Microwave Systems,
Inc., payable to Sam Nasiri and not to exceed $4,000,000.00 in the aggregate and (I) a working
capital adjustment not to exceed $550,000.00 in the aggregate.

(ii) "Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or being
contested in good faith by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a liability that is not yet due or delinquent, (iii)
any Lien created by operation of law, such as materialmen’s liens, mechanics’ liens and other
similar liens, arising in the ordinary course of business with respect to a liability that is not
yet due or delinquent or that are being contested in good faith by appropriate proceedings, (iv)
Liens securing the Company’s obligations under the Notes, (v) Liens (A) upon or in any equipment
(as defined in the Security Agreement) acquired or held by the Company or any of its Subsidiaries
to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of
financing the acquisition or lease of such equipment, or (B) existing on such equipment at the time
of its acquisition, provided that the Lien is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment, (vi) Liens incurred in connection with
the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in
clauses (i) and (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) Liens securing the
obligations under Permitted Senior Indebtedness; (viii) 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, (ix)
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 and (x) Liens arising from judgments,
decrees or attachments in circumstances not constituting an Event of Default under Section
4(a)(ix).

(jj) "Permitted Senior Indebtedness” means (i) the Mecar Facility, and (ii) the principal of
(and premium, if any), interest on, and all fees and other amounts (including, without limitation,
any reasonable out-of-pocket costs, enforcement expenses (including reasonable out-of-pocket legal
fees and disbursements), collateral protection expenses and other reimbursement or indemnity
obligations relating thereto) payable by Company and/or its Subsidiaries under or in connection
with any credit facility to be entered into by the Company and/or its Subsidiaries with one or more
financial institutions (together with any amendments, restatements, renewals, refundings,
refinancings or other extensions thereof); provided, however, that the aggregate
outstanding amount of such Indebtedness permitted pursuant to clause (ii) hereof (taking into
account the maximum amounts which may be advanced under the loan documents evidencing such
Permitted Senior Indebtedness) does not as of the date on which any such Permitted Senior
Indebtedness is incurred, or as of the end of any Calendar Quarter (the “Quarterly Test”), exceed
(x) in the event the EBITDA Target has not been met, (A) $5,000,000 prior to the Effective Date if
the Company has publicly announced receipt of one or more purchase orders for an aggregate amount
in excess of $40,000,000 for goods to be shipped or services to be provided within twelve (12)
months from the date of such order or orders (B) $10,000,000 following the Effective Date (y)
otherwise, 2.5x LTM Consolidated EBITDA.

(kk) "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.

(ll) "Principal Market” means the American Stock Exchange.

(mm) "Redemption Notices” means, collectively, the Event of Default Redemption Notices, Change
of Control Redemption Notices, the Holder Optional Redemption Notice and the Optional Redemption
Notices and, each of the foregoing, individually, a Redemption Notice.

(nn) "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%.

(oo) "Redemption Prices” means, collectively, the Event of Default Redemption Price, Change of
Control Redemption Price, the Holder Optional Redemption Price and the Optional Redemption Price
and, each of the foregoing, individually, a Redemption Price.

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

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

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

(ss) "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.

(tt) "Subscription Date” means March 9, 2006.

(uu) "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.

(vv) "Trading Day” means any day on which the Common Stock are 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 are then traded;
provided that “Trading Day” shall not include any day on which the Common Stock are scheduled to
trade on any such exchange or market for less than 4.5 hours or any day that the Common Stock are
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 any such exchange
or market, then during the hour ending at 4:00:00 p.m., New York Time).

(ww) "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).

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

(yy) "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 such security on such 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 Required Holders. If the Company and the
Required Holders are unable to agree upon the fair market value of such security, then such dispute
shall be resolved pursuant to Section 24. All such determinations to be appropriately adjusted for
any stock dividend, stock split, stock combination 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 two (2) Business Days 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 shall indicate to the 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]

1

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

	 
	 

	THE ALLIED DEFENSE GROUP, INC.

	 

	 

	 

	By:

	Name:

	Title:

2

EXHIBIT I

THE ALLIED DEFENSE GROUP, INC.

CONVERSION NOTICE

Reference is made to the Senior Subordinated Convertible Note (the “Note”) issued to the
undersigned by The Allied Defense Group, Inc. (the “Company”). In accordance with and pursuant to
the Note, the undersigned hereby elects to convert the Conversion Amount (as defined in the Note)
of the Note indicated below into shares of Common Stock par value $0.10 per share (the “Common
Stock”), as of the date specified below.

	 
	 

	Date of Conversion:

	 

	Aggregate Conversion Amount to be converted:

	 

	Please confirm the following information:

	 

	Conversion Price:

	 

	Number of shares of Common Stock to be issued:

	 

	Please issue the Common Stock into which the Note is being converted in the

following name and to the following address:

	 

	Issue to:

	 

	Facsimile Number:

	 

	Authorization:

	 

	By:

	 

	Title:

	 

	Dated:

	 

	Account Number:

	 

	  (if electronic book entry transfer)

	 

	Transaction Code Number:

	 

	  (if electronic book entry transfer)

ACKNOWLEDGMENT

The Company hereby acknowledges this Conversion Notice and hereby directs Mellon Investor
Services, LLC to issue the above indicated number of shares of Common Stock in accordance with the
Transfer Agent Instructions dated March 9, 2006 from the Company and acknowledged and agreed to by
Mellon Investor Services, LLC.

	 
	 

	THE ALLIED DEFENSE GROUP, INC.

	 

	 

	 

	By:

	 

	 

	 

	Name:

	 

	 

	 

	Title:

	 

3EX-10.3

WARRANT

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS WARRANT NOR THE SECURITIES INTO
WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR
TRANSFERRED OR ASSIGNED, UNLESS (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”), OR (B) PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF
COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO
THE COMPANY. 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 ALLIED DEFENSE GROUP, INC.

Warrant To Purchase Common Stock

Warrant No.:

Number of Shares of Common Stock:

Date of Issuance: March 9, 2006 (“Issuance Date”)

The Allied Defense Group, Inc., a Delaware corporation (the “Company”), hereby certifies that,
for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged,
     , the registered holder hereof or its permitted assigns (the “Holder”),
is entitled, subject to the terms set forth below, to purchase from the Company, at the Exercise
Price (as defined below) then in effect, upon surrender or exercise of this Warrant to Purchase
Common Stock (including any Warrants to Purchase Common Stock issued in exchange, transfer or
replacement hereof, the “Warrant”), at any time or times on or after the date hereof, but not after
11:59 p.m., New York time, on the Expiration Date (as defined below),      fully paid
nonassessable shares of Common Stock (as defined below) (the “Warrant Shares”). Except as
otherwise defined herein, capitalized terms in this Warrant shall have the meanings set forth in
Section 15. This Warrant is one of the Warrants to purchase Common Stock (the “SPA Warrants”)
issued pursuant to Section 1 of that certain Securities Purchase Agreement, dated as of March 9,
2006 (the “Subscription Date”), by and among the Company and the investors (the “Buyers”) referred
to therein (the “Securities Purchase Agreement”).

1. EXERCISE OF WARRANT.

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

(b) Exercise Price. For purposes of this Warrant, “Exercise Price” means $27.6773,
subject to adjustment as provided herein.

(c) Company’s Failure to Timely Deliver Securities. If the Company shall fail for any
reason or for no reason to issue to the Holder within three (3) Business Days of receipt of the
Exercise Delivery Documents, a certificate for the number of shares of Common Stock to which the
Holder is entitled and register such shares of Common Stock on the Company’s share register or to
credit the Holder’s balance account with DTC, as applicable, for such number of shares of Common
Stock to which the Holder is entitled upon the Holder’s exercise of this Warrant, then, in addition
to all other remedies available to the Holder, the Company shall pay in cash to the Holder on each
Trading Day after such third Business Day that the issuance of such shares of Common Stock is not
timely effected an amount equal to 1.0% of the product of (A) the sum of the number of shares of
Common Stock not issued to the Holder on a timely basis and to which the Holder is entitled and (B)
the Closing Sale Price of the shares of Common Stock on the trading day immediately preceding the
last possible date which the Company could have issued such shares of Common Stock to the Holder
without violating Section 1(a). In addition to the foregoing, if within three (3) Business Days
after the Company’s receipt of the facsimile copy of a Exercise Notice the Company shall fail to
issue and deliver a certificate to the Holder and register such shares of Common Stock on the
Company’s share register or credit the Holder’s balance account with DTC for the number of shares
of Common Stock to which the Holder is entitled upon such Holder’s exercise hereunder, and if on or
after such Business Day the Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Holder of shares of Common Stock issuable
upon such exercise that the Holder anticipated receiving from the Company (a “Buy-In"), then the
Company shall, within three (3) Business Days after the Holder’s request and in the Holder’s
discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s total purchase
price (including brokerage commissions, if any) for the shares of Common Stock so purchased (the
“Buy-In Price"), at which point the Company’s obligation to deliver such certificate (and to issue
such shares of Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to
the Holder a certificate or certificates representing such shares of Common Stock 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 date of exercise.

(d) Cashless Exercise. Notwithstanding anything contained herein to the contrary, if
a Registration Statement (as defined in the Registration Rights Agreement) covering the Warrant
Shares that are the subject of the Exercise Notice (the “Unavailable Warrant Shares”) is not
available for the resale of such Unavailable Warrant Shares at any time after the earlier of the
Effective Date and the Effectiveness Deadline (each as defined in the Registration Rights
Agreement), the Holder may, in its sole discretion, exercise this Warrant in whole or in part and,
in lieu of making the cash payment otherwise contemplated to be made to the Company upon such
exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise
the “Net Number” of shares of Common Stock determined according to the following formula (a
"Cashless Exercise”):

Net Number = (A x B) — (A x C)

B

For purposes of the foregoing formula:

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

B= the Closing Sale Price of the shares of Common Stock (as reported by Bloomberg)
on the date immediately preceding the date of the Exercise Notice.

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

(e) Disputes. In the case of a dispute as to the determination of the Exercise Price
or the arithmetic calculation of the Warrant Shares, the Company shall promptly issue to the Holder
the number of Warrant Shares that are not disputed and resolve such dispute in accordance with
Section 12.

(f) Limitations on Exercises.

(i) Beneficial Ownership. The Company shall not effect the exercise
of this Warrant, and the Holder shall not have the right to exercise this
Warrant, to the extent that after giving effect to such exercise, such
Person (together with such Person’s affiliates) would beneficially own in
excess of 9.99% of the shares of Common Stock outstanding immediately after
giving effect to such exercise. For purposes of the foregoing sentence, the
aggregate number of shares of Common Stock beneficially owned by such Person
and its affiliates shall include the number of shares of Common Stock
issuable upon exercise of this Warrant with respect to which the
determination of such sentence is being made, but shall exclude shares of
Common Stock which would be issuable upon (i) exercise of the remaining,
unexercised portion of this Warrant beneficially owned by such Person and
its affiliates and (ii) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company beneficially
owned by such Person and its affiliates (including, without limitation, any
convertible notes or convertible preferred stock or warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein. Except as set forth in the preceding sentence, for purposes of this
paragraph, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. For
purposes of this Warrant, in determining the number of outstanding shares of
Common Stock, the Holder may rely on the number of outstanding shares of
Common Stock as reflected in (1) the Company’s most recent Form 10-K, Form
10-Q, Current Report on Form 8-K or other public filing with the Securities
and Exchange Commission, as the case may be, (2) a more recent public
announcement by the Company or (3) any other notice by the Company or the
Transfer Agent setting forth the number of shares of Common Stock
outstanding. For any reason at any time, upon the written request of the
Holder, the Company shall within two Business Days confirm 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 the SPA Securities and the SPA Warrants, by the Holder and 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, from time to time, increase or decrease the Maximum Percentage to any
other percentage not in excess of 9.99% specified in such notice; provided
that (i) any such increase will not be effective until the sixty-first
(61st) day after such notice is delivered to the Company, and
(ii) any such increase or decrease will apply only to the Holder and not to
any other holder of SPA Warrants.

(ii) Principal Market Regulation. The Company shall not be
obligated to issue any shares of Common Stock upon exercise of this Warrant
if the issuance of such shares of Common Stock would exceed that number of
 shares of Common Stock which the Company may issue upon exercise of this
Warrant (including, as applicable, any shares of Common Stock issued upon
conversion, redemption or exercise of the SPA Securities) without breaching
the Company’s obligations under the rules or regulations of the Principal
Market (the number if shares which may be issued without violating such
rules and regulations, the “Exchange Cap”), except that such limitation
shall not apply in the event that the Company (A) obtains the approval of
its stockholders as required by the applicable rules of the Principal Market
for issuances of shares of Common Stock in excess of such amount or (B)
obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to
the Required Holders. Unless and until such approval or written opinion is
obtained, no Buyer shall be issued, upon exercise or conversion, as
applicable, of any SPA Warrants or SPA Securities, shares of Common Stock in
an amount greater than the product of the Exchange Cap multiplied by a
fraction, the numerator of which is the total number of shares of Common
Stock issued to such Buyer pursuant to the Securities Purchase Agreement on
the Issuance Date and the denominator of which is the aggregate number of
 shares of Common Stock issued to the Buyers pursuant to the Securities
Purchase Agreement on the Issuance Date (with respect to each Buyer, the
“Exchange Cap Allocation”). In the event that any Buyer shall sell or
otherwise transfer any of such Buyer’s SPA Warrants, the transferee shall be
allocated a pro rata portion of such Buyer’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 SPA Warrants shall exercise all
of such holder’s SPA Warrants 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 SPA
Warrants on a pro rata basis in proportion to the shares of Common Stock
underlying the SPA Warrants then held by each such holder.

(g) Insufficient Authorized Shares. If at any time while any of the Warrants remain
outstanding the Company does not have a sufficient number of authorized and unreserved shares of
Common Stock to satisfy its obligation to reserve for issuance upon exercise of the Warrants at
least a number of shares of Common Stock equal to 120% (the “Required Reserve Amount”) of the
number of shares of Common Stock as shall from time to time be necessary to effect the exercise of
all of the Warrants then outstanding (an “Authorized Share Failure”), then the Company shall
immediately take all action necessary to increase the Company’s authorized shares of Common Stock
to an amount sufficient to allow the Company to reserve the Required Reserve Amount for the
Warrants then outstanding. Without limiting the generality of the foregoing sentence, as soon as
practicable after the date of the occurrence of an Authorized Share Failure, but in no event later
than ninety (90) days after the occurrence of such Authorized Share Failure, the Company shall hold
a meeting of its stockholders for the approval of an increase in the number of authorized shares of
Common Stock. In connection with such meeting, the Company shall provide each stockholder with a
proxy statement and shall use its best efforts to solicit its stockholders’ approval of such
increase in authorized shares of Common Stock and to cause its board of directors to recommend to
the stockholders that they approve such proposal.

2. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The Exercise Price and
the number of Warrant Shares shall be adjusted from time to time as follows:

(a) Adjustment Upon Issuance of Shares of Common Stock. If and whenever on or after
the Subscription Date the Company issues or sells, or in accordance with this Section 2 is deemed
to have issued or sold, any shares of Common Stock (including the issuance or sale of shares of
Common Stock owned or held by or for the account of the Company, but excluding shares of Common
Stock deemed to have been issued by the Company in connection with any Excluded Securities (as
defined in the SPA Securities) for a consideration per share less than a price (the “Applicable
Price”) equal to the Exercise Price in effect immediately prior to such issue or sale or deemed
issuance or sale (the foregoing a “Dilutive Issuance"), then immediately after such Dilutive
Issuance, the Exercise Price then in effect shall be reduced to an amount equal to the product of
(A) the Exercise Price in effect immediately prior to such Dilutive Issuance and (B) the quotient
determined by dividing (1) the sum of (I) the product derived by multiplying the Exercise Price in
effect immediately prior to such Dilutive Issuance and the number of shares of Common Stock Deemed
Outstanding immediately prior to such Dilutive Issuance plus (II) the consideration, if any,
received by the Company upon such Dilutive Issuance by (2) the product derived by multiplying (I)
the Exercise Price in effect immediately prior to such Dilutive Issuance by (II) the number of
shares of Common Stock Deemed Outstanding immediately after such Dilutive Issuance. Upon each such
adjustment of the Exercise Price hereunder, the number of Warrant Shares shall be adjusted to the
number of shares of Common Stock determined by multiplying the Exercise Price in effect immediately
prior to such adjustment by the number of Warrant Shares acquirable upon exercise of this Warrant
immediately prior to such adjustment and dividing the product thereof by the Exercise Price
resulting from such adjustment. Notwithstanding anything to the contrary, no adjustment to the
Exercise Price will be made in connection with any Excluded Securities. For purposes of
determining the adjusted Exercise Price under this Section 2(a), the following shall be applicable:

(i) Issuance of Options. If the Company in any manner grants
any Options and the lowest then available price per share for which one
share of Common Stock is issuable upon the exercise of any such Option or
upon conversion, exercise or exchange of any Convertible Securities issuable
upon exercise of any such Option is less than the Applicable Price, then
such share of Common Stock shall be deemed to be outstanding and to have
been issued and sold by the Company at the time of the granting or sale of
such Option for such price per share. For purposes of this Section 2(a)(i),
the “lowest price per share for which one share of Common Stock is issuable
upon the exercise of any such Options or upon conversion, exercise or
exchange of any Convertible Securities issuable upon exercise of any such
Option” shall be equal to the sum of the lowest amounts of consideration (if
any) received or then receivable by the Company with respect to any one
share of Common Stock upon the granting or sale of the Option, upon exercise
of the Option and upon conversion, exercise or exchange of any Convertible
Security issuable upon exercise of such Option. No further adjustment of
the Exercise Price or number of Warrant Shares shall be made upon the actual
issuance of such shares of Common Stock or of such Convertible Securities
upon the exercise of such Options or upon the actual issuance of such shares
of Common Stock upon conversion, exercise or exchange of such Convertible
Securities.

(ii) Issuance of Convertible Securities. If the Company in any
manner issues or sells any Convertible Securities and the lowest price per
share for which one share of Common Stock is then issuable upon the
conversion, exercise or exchange thereof is less than the Applicable Price,
then such share of Common Stock shall be deemed to be outstanding and to
have been issued and sold by the Company at the time of the issuance or sale
of such Convertible Securities for such price per share. For the purposes
of this Section 2(a)(ii), the “lowest price per share for which one share of
Common Stock is issuable upon the conversion, exercise or exchange thereof”
shall be equal to the sum of the lowest amounts of consideration (if any)
received or receivable by the Company with respect to one share of Common
Stock upon the issuance or sale of the Convertible Security and upon
conversion, exercise or exchange of such Convertible Security. No further
adjustment of the Exercise Price or number of Warrant Shares shall be made
upon the actual issuance of such shares of Common Stock upon conversion,
exercise or exchange of such Convertible Securities, and if any such issue
or sale of such Convertible Securities is made upon exercise of any Options
for which adjustment of this Warrant has been or is to be made pursuant to
other provisions of this Section 2(a), no further adjustment of the Exercise
Price or number of Warrant Shares 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, exercise or exchange of any
Convertible Securities, or the rate at which any Convertible Securities are
convertible into or exercisable or exchangeable for shares of Common Stock
increases or decreases at any time, the Exercise Price and the number of
Warrant Shares in effect at the time of such increase or decrease shall be
adjusted to the Exercise Price and the number of Warrant Shares which would
have been in effect at such time had such Options or Convertible Securities
provided for such increased or decreased purchase price, additional
consideration or increased or decreased conversion rate, as the case may be,
at the time initially granted, issued or sold. For purposes of this Section
2(a)(iii), if the terms of any Option or Convertible Security that was
outstanding as of the date of issuance of this Warrant are increased or
decreased in the manner described in the immediately preceding sentence,
then such Option or Convertible Security and the shares of Common Stock
deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such increase or decrease. No
adjustment pursuant to this Section 2(a) shall be made if such adjustment
would result in an increase of the Exercise Price then in effect or a
decrease in the number of Warrant Shares.

(iv) Calculation of Consideration Received. In case any Option
is issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the
Options will be deemed to have been issued for a consideration of $0.01. If
any shares of Common Stock, Options or Convertible Securities are issued or
sold or deemed to have been issued or sold for cash, the consideration
received therefor will be deemed to be the net amount received by the
Company therefor. If any shares of Common Stock, Options or Convertible
Securities are issued or sold for a consideration other than cash, the
amount of such consideration received by the Company will be the fair value
of such consideration as determined in good faith by the Board of Directors,
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 security on the date of receipt. If any shares of Common
Stock, Options or Convertible Securities are issued to the owners of the
non-surviving entity in connection with any merger in which the Company is
the surviving entity, the amount of consideration therefor will be deemed to
be the fair value of such portion of the net assets and business of the
non-surviving entity as is attributable to such shares of Common Stock,
Options or Convertible Securities, as the case may be. The fair value of
any consideration other than cash or securities will be determined in good
faith by the Board of Directors.

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

(vi) Until such time as the Company receives the Stockholder Approval
(as defined in the Securities Purchase Agreement), no adjustment pursuant to
Section 2(a) shall cause the Exercise Price to be less than $23.05 (as
adjusted for any stock dividend, stock split, stock combination,
reclassification or similar transaction) (the “Exercise Floor Price”).

(b) Adjustment upon Subdivision or Combination of Common Stock. If the Company at any
time on or after the Subscription Date subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to such subdivision will
be proportionately reduced and the number of Warrant Shares will be proportionately increased. 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 Exercise Price in effect immediately prior to such combination will be
proportionately increased and the number of Warrant Shares will be proportionately decreased. Any
adjustment under this Section 2(b) shall become effective at the close of business on the date the
subdivision or combination becomes effective.

(c) 1%. No adjustment in the Exercise Price shall be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in such price; provided,
however, that any adjustment which by reason of this Section 2(c) are not required to be made shall
be carried forward and taken into account in any subsequent adjustment. All calculations under
this Section 2 shall be made by the Company in good faith and shall be made to the nearest cent or
to the nearest one hundredth of a share, as applicable. No adjustment need be made for a change in
the par value or no par value of the Company’s Common stock.

(d) Other Events. If any event occurs of the type contemplated by the provisions of
this Section 2 but not expressly provided for by such provisions (including, without limitation,
the granting of stock appreciation rights, phantom stock rights or other rights with equity
features), then the Company’s Board of Directors will make an appropriate adjustment in the
Exercise Price and the number of Warrant Shares so as to protect the rights of the Holder; provided
that no such adjustment pursuant to this Section 2(c) will increase the Exercise Price or decrease
the number of Warrant Shares as otherwise determined pursuant to this Section 2.

3. RIGHTS UPON DISTRIBUTION OF ASSETS. If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares
of Common Stock, by way of return of capital or otherwise (including, without limitation, any
distribution of cash, stock or other securities, property or options by way of a dividend, spin
off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction)
(a “Distribution”), at any time after the issuance of this Warrant, then, in each such case:

(a) any Exercise Price in effect immediately prior to the close of business on the record date
fixed for the determination of holders of shares of Common Stock entitled to receive the
Distribution shall be reduced, effective as of the close of business on such record date, to a
price determined by multiplying such Exercise Price by a fraction of which (i) the numerator shall
be the Closing Bid Price of the shares of Common Stock on the trading day immediately preceding
such record date minus the value of the Distribution (as determined in good faith by the Company’s
Board of Directors) applicable to one share of Common Stock, and (ii) the denominator shall be the
Closing Bid Price of the shares of Common Stock on the trading day immediately preceding such
record date; and

(b) the number of Warrant Shares shall be increased to a number of shares equal to the number
of shares of Common Stock obtainable immediately prior to the close of business on the record date
fixed for the determination of holders of shares of Common Stock entitled to receive the
Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding
paragraph (a); provided that in the event that the Distribution is of shares of Common Stock (or
common stock) (“Other Shares of Common Stock”) of a company whose common shares are traded on a
national securities exchange or a national automated quotation system, then the Holder may elect to
receive a warrant to purchase Other Shares of Common Stock in lieu of an increase in the number of
Warrant Shares, the terms of which shall be identical to those of this Warrant, except that such
warrant shall be exercisable into the number of shares of Other Shares of Common Stock that would
have been payable to the Holder pursuant to the Distribution had the Holder exercised this Warrant
immediately prior to such record date and with an aggregate exercise price equal to the product of
the amount by which the exercise price of this Warrant was decreased with respect to the
Distribution pursuant to the terms of the immediately preceding paragraph (a) and the number of
Warrant Shares calculated in accordance with the first part of this paragraph (b).

4. PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.

(a) Purchase Rights. In addition to any adjustments pursuant to Section 2 above, if
at any time the Company grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the record holders of any class
of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder
could have acquired if the Holder had held the number of shares of Common Stock acquirable upon
complete exercise of this Warrant (without regard to any limitations on the exercise of this
Warrant) immediately before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the record holders of
shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.

(b) Fundamental Transactions. The Company shall not enter into or be party to a
Fundamental Transaction unless (i)  the Successor Entity assumes in writing all of the obligations
of the Company under this Warrant and the other Transaction Documents in accordance with the
provisions of this Section (4)(b) 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 Warrants in exchange for such Warrants a security
of the Successor Entity evidenced by a written instrument substantially similar in form and
substance to this Warrant, including, without limitation, an adjusted exercise price equal to the
value for the shares of Common Stock reflected by the terms of such Fundamental Transaction, and
exercisable for a corresponding number of shares of capital stock equivalent to the shares of
Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any
limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and
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 Warrant referring to the “Company” shall refer instead to the Successor Entity),
and may exercise every right and power of the Company and shall assume all of the obligations of
the Company under this Warrant with the same effect as if such Successor Entity had been named as
the Company herein. Upon consummation of the Fundamental Transaction, the Successor Entity shall
deliver to the Holder confirmation that there shall be issued upon exercise of this Warrant at any
time after the consummation of the Fundamental Transaction, in lieu of the shares of the Common
Stock (or other securities, cash, assets or other property) issuable upon the exercise of the
Warrant prior to such Fundamental Transaction, such shares of the publicly traded common stock (or
its equivalent) of the Successor Entity (including its Parent Entity), as adjusted in accordance
with the provisions of this Warrant. In addition to and not in substitution for any other rights
hereunder, prior to the consummation of any Fundamental Transaction pursuant to which holders of
shares of Common Stock are entitled to receive securities or other assets with respect to or in
exchange for shares of Common Stock (a “Corporate Event”), the Company shall make appropriate
provision to insure that the Holder will thereafter have the right to receive upon an exercise of
this Warrant at any time after the consummation of the Fundamental Transaction but prior to the
Expiration Date, in lieu of the shares of the Common Stock (or other securities, cash, assets or
other property) issuable upon the exercise of the Warrant prior to such Fundamental Transaction,
such shares of stock, securities, cash, assets or any other property whatsoever (including warrants
or other purchase or subscription rights) which the Holder would have been entitled to receive upon
the happening of such Fundamental Transaction had the Warrant been exercised immediately prior to
such Fundamental Transaction. Provision made pursuant to the preceding sentence shall be in a form
and substance reasonably satisfactory to the Required Holders. The provisions of this Section
shall apply similarly and equally to successive Fundamental Transactions and Corporate Events and
shall be applied without regard to any limitations on the exercise of this Warrant.

(c) Notwithstanding the foregoing and the provisions of Section 4(b) above, in the event of a
Fundamental Transaction, if the Holder has not exercised the Warrant in full prior to the
consummation of the Fundamental Transaction, at the request of the Holder delivered before the 90th
day after such Fundamental Transaction, the Company (or the Successor Entity) shall purchase this
Warrant from the Holder by paying to the Holder, cash in an amount equal to the Black Scholes value
of the remaining unexercised portion of this Warrant on the date of such Fundamental Transaction.

5. 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 Warrant, and will at all times in good faith carry out all the provisions
of this Warrant and take all action as may be required to protect the rights of the Holder.
Without limiting the generality of the foregoing, the Company (i) shall not increase the par value
of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price
then in effect, (ii) shall take all such actions as may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon
the exercise of this Warrant, and (iii) shall, so long as any of the SPA Warrants are outstanding,
take all action necessary to reserve and keep available out of its authorized and unissued shares
of Common Stock, solely for the purpose of effecting the exercise of the SPA Warrants, 120% of the
number of shares of Common Stock as shall from time to time be necessary to effect the exercise of
the SPA Warrants then outstanding (without regard to any limitations on exercise).

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

7. REISSUANCE OF WARRANTS.

(a) Transfer of Warrant. If this Warrant is to be transferred, the Holder shall
surrender this Warrant to the Company, whereupon the Company will subject to the satisfaction of
the transfer provisions of the Securities Purchase Agreement forthwith issue and deliver upon the
order of the Holder a new Warrant (in accordance with Section 7(d)), registered in the name of the
registered transferee or assignee, representing the right to purchase the number of Warrant Shares
being transferred by the Holder and, if less then the total number of Warrant Shares then
underlying this Warrant is being transferred, a new Warrant (in accordance with Section 7(d)) to
the Holder representing the right to purchase the number of Warrant Shares not being transferred.

(b) Lost, Stolen or Mutilated Warrant. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this
Warrant, 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 Warrant, the Company shall execute and deliver to the Holder a new Warrant (in
accordance with Section 7(d)) representing the right to purchase the Warrant Shares then underlying
this Warrant.

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

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

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

9. AMENDMENT AND WAIVER. Except as otherwise provided herein, the provisions of this
Warrant may be amended and the Company may take any action herein prohibited, or omit to perform
any act herein required to be performed by it, only if the Company has obtained the written consent
of the Required Holders; provided that no such action may increase the exercise price of any SPA
Warrant or decrease the number of shares or class of stock obtainable upon exercise of any SPA
Warrant without the written consent of the Holder. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the SPA Warrants then outstanding.

10. GOVERNING LAW. This Warrant shall be governed by and construed and enforced in
accordance with, and all questions concerning the construction, validity, interpretation and
performance of this Warrant shall be governed by, the internal laws of the State of New York,
without giving effect to any choice of law or conflict of law provision or rule (whether of the
State of New York or any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.

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

12. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Exercise Price or the arithmetic calculation of the Warrant Shares, the Company shall submit the
disputed determinations or arithmetic calculations via facsimile within two Business Days of
receipt of the Exercise Notice 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 of the
Exercise Price or the Warrant Shares within three Business Days of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall, within two Business
Days submit via facsimile (a) the disputed determination of the Exercise Price to an independent,
reputable investment bank selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Warrant Shares to the Company’s independent, outside accountant. The
Company shall cause at its expense the investment bank or the accountant, as the case may be, to
perform the determinations or calculations and notify the Company and the Holder of the results no
later than ten 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.

13. REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies
provided in this Warrant shall be cumulative and in addition to all other remedies available under
this Warrant and the other Transaction Documents, at law or in equity (including a decree of
specific performance and/or other injunctive relief), and nothing herein shall limit the right of
the Holder right to pursue actual damages for any failure by the Company to comply with the terms
of this Warrant. The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Holder and that the remedy at law for any such breach may be
inadequate. The Company therefore agrees that, in the event of any such breach or threatened
breach, the holder of this Warrant shall be entitled, in addition to all other available remedies,
to an injunction restraining any breach, without the necessity of showing economic loss and without
any bond or other security being required.

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

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

(a) "Black Scholes Value” means the value of this Warrant based on the Black and Scholes
Option Pricing Model obtained from the “OV” function on Bloomberg determined as of the day
immediately following the public announcement of the applicable Fundamental Transaction and
reflecting (i) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal
to the remaining term of this Warrant as of such date of request and (ii) an expected volatility
equal to the greater of 60% and the 100 day volatility obtained from the HVT function on Bloomberg.

(b) "Bloomberg” means Bloomberg Financial Markets.

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

(d) "Closing 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 12. All such determinations to be appropriately adjusted for any
stock dividend, stock split, stock combination or other similar transaction during the applicable
calculation period.

(e) "Common Stock” means (i) the Company’s shares of Common Stock, $0.10 par value per share,
and (ii) any share capital into which such Common Stock shall have been changed or any share
capital resulting from a reclassification of such Common Stock.

(f) “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 2(a)(i) and 2(a)(ii) hereof regardless of whether the Options or
Convertible Securities are actually exercisable at such time, but excluding any shares of Common
Stock owned or held by or for the account of the Company or issuable upon conversion and exercise,
as applicable, of the SPA Securities and the Warrants.

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

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

(i) "Expiration Date” means the date sixty months after the Issuance Date or, if such date
falls on a day other than a Business Day or on which trading does not take place on the Principal
Market (a “Holiday”), the next date that is not a Holiday.

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

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

(l) "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.

(m) "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.

(n) "Principal Market” means the American Stock Exchange.

(o) "Registration Rights Agreement” means that certain registration rights agreement by and
among the Company and the Buyers.

(p) "Required Holders” means the holders of the SPA Warrants representing at least a majority
of shares of Common Stock underlying the SPA Warrants then outstanding.

(q) "SPA Securities” means the Notes issued pursuant to the Securities Purchase Agreement.

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

[Signature Page Follows]

1

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

	 	 	 	THE
ALLIED DEFENSE GROUP, INC.

By:

Name:

Title:

2

EXHIBIT A

EXERCISE NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

THE ALLIED DEFENSE GROUP, INC.

The undersigned holder hereby exercises the right to purchase      of the shares
of Common Stock (“Warrant Shares”) of The Allied Defense Group, Inc., a Delaware corporation (the
"Company”), evidenced by the attached Warrant to Purchase Common Stock (the “Warrant”).
Capitalized terms used herein and not otherwise defined shall have the respective meanings set
forth in the Warrant.

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

	 	 	 
	     

	 	a “Cash Exercise” with respect to      

Warrant Shares; and/or
	 
	 	 
	     

	 	a “Cashless Exercise” with respect to      

Warrant Shares.

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

3. Delivery of Warrant Shares. The Company shall deliver to the holder      Warrant
Shares in accordance with the terms of the Warrant.

Date:      ,      

Name of Registered Holder

By:

Name:

Title:

3

ACKNOWLEDGMENT

The Company hereby acknowledges this Exercise Notice and hereby directs Mellon Investor
Services, LLC to issue the above indicated number of shares of Common Stock in accordance with the
Transfer Agent Instructions dated March 9, 2006 from the Company and acknowledged and agreed to by
Mellon Investor Services, LLC.

THE ALLIED DEFENSE GROUP, INC.

By:

Name:

Title:

4

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